Business

Slowdown, inflation constrict Fed chief

An ugly brew of rising unemployment, spiking foreclosures and gyrating energy prices is plaguing the country and making life difficult for Federal Reserve Chairman Ben Bernanke as he tries to right the economy.

Bernanke and his central bank colleagues are faced with dueling problems: weak economic growth and advancing inflation. To treat one risks aggravating the other. So the Fed is widely expected when it meets Tuesday to leave a key interest rate alone.

“It is caught between a rock and a hard place. The (Fed) will stand pat,” predicted Sung Won Sohn, an economics professor at California State University.

If Sohn and other economists prove correct, the Fed's rate will stay at 2 percent. And, in turn, the prime lending rate for millions of consumers and businesses would stay at 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other lines.

With inflation worries growing, the Fed in June halted a nearly yearlong string of rate reductions, one of its most aggressive campaigns to shore up the wobbly economy. Additional rate reductions would aggravate inflation, and some don't think additional cuts would provide much relief to the economy's biggest problems: the collapsed housing market and credit troubles.

President Bush recently signed into law Congress' housing rescue package. The plan would make it easier for thousands of people at risk of losing their home to refinance into a cheaper, government-backed mortgage.

The Fed, meanwhile, has taken a number of extraordinary steps to ease credit problems so that banks, investment houses and others will keep on lending. The free flow of credit is like oxygen to the economy. Without it, people find it difficult to make big-ticket purchases like homes and cars, and businesses are less inclined to expand and hire workers.

The unemployment rate zoomed to a four-year high of 5.7 percent in July as businesses hunkered down to ride out the slump. Nearly half a million jobs have disappeared so far this year. More losses are expected.

The jobless rate could hit 6.5 percent by the middle of next year.

  Comments