WASHINGTON — When Federal Reserve Chairman Ben Bernanke meets with colleagues Tuesday, the group is widely expected to leave a key interest rate alone. Driving their decision are dueling problems: weak economic growth and advancing inflation.
”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 Channel Islands.
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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.
Terry Connelly, dean of Golden Gate University's Ageno School of Business, described the condition of the economy as ”moving from pneumonia to anemia.“ Because of that, the Fed can't afford to boost rates to fend off inflation concerns. That would slow things down even more. ”It is not yet time to prescribe a sedative,“ he said.