You are the Chairman of the FOMC, what do you do?

Question

The committee is deadlocked between a 25 basis point increase, a pause in interest rate hikes and a 25 basis point descrease. You have the casting vote, what do you decide?

This question will close at 2.00pm EDT on Tuesday August 8th 2006, but will not be voted on until the FOMC's decision at 2.15pm EDT. The best answer will be determined by whoever get the answer right (based on the FOMC's decision) but also the best explaniation for that decision.

FOMC = Federal Open Money Commitee (the US Interest rate setting policy committee)
EDT = Eastern Daylight Time ( see www.timeanddate.com)

Answer 1

I think they'll hold tomorrow, and will make a dovish statement too ......

In coming months, I seriously think they know they've over shot, and will make one or two cuts, starting in January

Answer 2

The FOMC is most concerned with inflation. The assumption being that inflation is demand fuelled: people are confident demand more and more stuff, however the economy is having problems hiring people and expanding production, so prices go up.

However, the latest development on the front of job creation shows that demand pressures just aren't there anymore. It doesn't mean that inflation will not be there; oil prices are through the roof, BP closing in Alaska... That is bound to put pressures on costs of production and therefore prices. We could have cost/supply driven, rather than demand driven inflation. Increasing rates would only make things worse. So definitely no interest rate hike this time. (In fact I would consider the guys pushing for a hike with suspicion).

I think that a cut might be needed, but to do so right now after the hikes might send people the wrong signal, send them into panic mode and really wreck the economy.

I'd keep the rates unchanged this time, but issue a statement focusing on the employment indicators and the cost issues, so that if necessary the next time I can easily cut rates without much of a fuss.

Answer 3

I would conclude that the past series interest rate hikes had done nothing to slow inflation. I would conclude that growth in the economy had not been previously helped by lower interest rates but rather by increased government borrowing and spending. I would take the deadlock as proof that none of them had a clue to what was happening in the economy. As a crony of the administration I would want to allow the government to borrow more money more cheaply to finance the expanding war on terrorism. (filling the pockets of defense contractors-political donors) The main thing would be protecting the vital interests of the United States: the ability of the government to borrow money cheaply to finance their own objectives. Therefore I would vote to cut interest rates.

Answer 4

I think that they have invented inflation worries as an excuse to put up interest rates. Their real concern is with irresponsible borrowing on credit cards and pushing house prices up to even more ridiculous levels. What they should have done a long time ago, is to insist on regulating the amount of money that could be loaned to each individual when buying a house. That would have left them free to do as they will with interest rates, vis a vis, the economy. It has to be said that they have played around with the inflation measure in order to downplay it. House prices and petrol are excluded, also inflation has increased dramatically in the public sector. Take a look at Council tax, and other taxes, they are also excluded.

Answer 5

What is the FOMC and the EDT

Answer 6

interest rates on hold