Well folks, since my last column, the Federal Reserve held its quarterly meeting and issued its usual press release. As anticipated, the board left short term interest rates unchanged. But the press release contained some very interesting statements.
For the last decade, Fed Chairman Alan Greenspan has been an inflation fighter. And he's never been shy to jack up rates if signs of inflation pop up. In 1994, and again in 1999, when the economy showed signs of overheating, the Fed Chairman made several interest rate hikes to ensure stable wholesale and retail prices.
Now it appears that deflation, which is defined as a continuing decrease in prices, is the new threat to the economy. When prices fall, business revenues drop. This can result in wage cuts, hiring freezes and lay-offs.
Although most experts predict that full scale deflation is unlikely, the recent report on prices showed an increase of only one percent. Technically that's not deflation, but it's surely a small enough rise to cause concern. Let me share with you three interesting statements from the Fed's press release:
- "Recent readings on production and employment, though mostly reflecting decisions made before the conclusion of hostilities, have proven disappointing". Translation: A nice way of saying the U.S. economy is not improving.
- The Fed is predicting an economic rebound but "the timing and extent of that improvement remain uncertain". Translation: The Fed still has no clue when the economy is going to pick up.
- "…the probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level". Translation: The Fed is more worried about deflation than inflation.
This is quite a turnabout for Chairman Greenspan, the Inflation Fighter. One thing we can probably bet on: if the economy continues to show signs of "disinflation" or even deflation, mortgage rates will likely stay low or fall further. This will continue to make housing more affordable for buyers. And just as important, existing homeowners will continue to reap the benefits of lower rates through refinancing. I'll keep you posted.
Published: May 23, 2003
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