Fed Committee Weighs Interest Rate Quandary

Copyright © 2008 National Public Radio®. For personal, noncommercial use only. See Terms of Use. For other uses, prior permission required.

STEVE INSKEEP, host:

The people who are supposed to know where the economy is headed - if anybody does - are meeting today. And so this morning we're going to try to figure out what's on their minds. It's a meeting of the Federal Reserve. And David Wessel is paying attention. He's economics editor of The Wall Street Journal and a regular guest of this program.

Good morning once again.

Mr. DAVID WESSEL (Wall Street Journal): Good morning.

INSKEEP: Before we get to what they're thinking, what is the Fed likely to do about the economy today?

Mr. WESSEL: Well, this time it's easy. They've sent very clear signals they're going to hold the short term interest rates that they control at 2 percent, where they've been since the end of April. And they'll put out a statement that'll undoubtedly warn that the economy faces a lot of downside risk - as they put it - and express concern about the upward trend in inflation. And the markets will parse every adverb to try and figure out are these guys really going to raise interest rates this year or are they just going to hold them down and hope that that helps the economy recover from this credit crunch.

INSKEEP: I suppose we should mention that this is a moment when the Fed is intervening in the economy in far more ways than ever before.

Mr. WESSEL: Of course. And that's a sign of how worried they are about the economy. All these efforts to shore up the banks or improve what they call the liquidity in the markets are a clear sign that they don't think the worst of the credit crisis is over. And that's the argument for not raising interest rates now.

INSKEEP: Well, let me ask about what they're doing, though, David Wessel. Because as they try to prop up these financial institutions, they're putting extra money into the economy. Does that end up fueling the inflation that some of the members of the Fed are very worried about?

Mr. WESSEL: You'd be a good member of the Fed. You could be on the hawkish wing there, Steve. Yes, some of the Federal Reserve policymakers, having looked at history, say that when the Fed holds interest rates low for a long time, it inevitable shows up in inflation down the road. So most of the people in the markets expect, for instance, the president of the Dallas Fed, Richard Fisher, to dissent at this meeting today and favor higher interest rates and maybe the president of the Philadelphia Fed to do the same.

INSKEEP: One of our correspondents, Adam Davidson, has been talking with a lot of economists, and he says that there is a feeling out there that we face a choice. We can accept a worse recession or we can accept a lot of bad consequences later, including inflation. Is that the choice? We either have a problem now or a different kind of problem later?

Mr. WESSEL: Well, anything we do now will create problems in the future. But I don't think the choice is quite as clean as that. If you are very convinced that we're at risk of a serious, serious recession, then there isn't much question that the Fed needs to fight that now and worry about inflation later.

INSKEEP: Because you don't know how it could get.

Mr. WESSEL: Right. On the other hand, so far the economy's been growing. And that argues for being a little more cautious on interest rates.

INSKEEP: You know, it's been two or three months, David Wessel, since people were saying, OK, we must be in a recession now, even though we can't tell it. Are you saying that after a few more months and numbers have come in you're not convinced we're in a recession?

Mr. WESSEL: Well, I personally think it's very likely we're in recession, but the official bean counters haven't weighed in yet. As you know, the government last week revised some of its numbers. And now we know that the fourth quarter of last year was a negative quarter. The economy contracted. It's only a matter of time before the official arbiters - the National Bureau of Economic Research, a nonprofit outfit - actually makes the call.

INSKEEP: How much does the presidential campaign affect this supposedly nonpartisan agency?

Mr. WESSEL: I don't think they are going to be influenced on their interest rate decisions by the contest between Mr. Obama and Mr. McCain. After all, it's not clear to me what difference it would make anyways. But when they think about interest rates, they have to look ahead to the economy of early next year. And they have to ask themselves will the next president and the next Congress be spending a lot of energy trying to pump up the economy, putting a lot of tax cuts or spending increases into it. And they have to set interest rates with that in mind.

INSKEEP: Meaning they have to pay attention to the politicians' campaign promises and act accordingly?

Mr. WESSEL: No. They have to pay attention to what they expect the politicians will actually do and act accordingly.

(Soundbite of laughter)

INSKEEP: Which may be different from the promises. David, thanks very much.

Mr. WESSEL: You're welcome.

INSKEEP: David Wessel of the Wall Street Journal.

Copyright © 2008 National Public Radio®. All rights reserved. No quotes from the materials contained herein may be used in any media without attribution to National Public Radio. This transcript is provided for personal, noncommercial use only, pursuant to our Terms of Use. Any other use requires NPR's prior permission. Visit our permissions page for further information.

NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR's programming is the audio.