The Federal Reserve Prepares To Take On Rising Gas Prices
Monday, June 23, 2008PAUL KANGAS: The Federal Reserve is also worried about rising gasoline prices. The central bank is worried they're getting under consumers' skins and pushing up inflation expectations. Tomorrow, the Fed begins a two-day meeting on interest rates, and energy will be on the agenda. Tonight, Darren Gersh looks at what the Fed can do about rising prices.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: If it makes you feel better, economists have a name for the anxiety you feel when you pay to gas up: it's called a supply shock. And because oil markets are global and the supply of crude is fairly fixed, the traditional short-term domestic interest rate levers the Federal Reserve manipulates don't have much of an impact on the price per gallon. So former Fed staffer Douglas Elmendorf says, some patience is required.
DOUGLAS ELMENDORF, SR. FELLOW, BROOKINGS: The Federal Reserve can't reverse supply shocks directly. What it can do is to let the overall economy weaken enough that the disinflationary effects of a weak economy offset inflationary effects of supply shocks.
GERSH: That means, as we spend more money on our gas tanks, we have less money to spend at, say, a restaurant which means businesses like restaurants have a harder time raising their prices which also explains why the Fed really can't cut interest rates now to boost what is actually a pretty soft economy.
ELEMDORF: They are not going to try to push the economy back to fast growth right away because that would be too fast growth to keep inflation low.
GERSH: If the source of inflation were home grown, say an overheating U.S. job market, life would be easier for the Fed. It would simply raise interest rates to tamp down demand. But Lehman Brothers economist Ethan Harris does not recommend the Fed take the advice of inflation hard-liners and hike rates.
ETHAN HARRIS, CHIEF U.S. ECONOMIST, LEHMAN BROTHERS: It is a little hard for the Fed to sell the public on the idea that we're going to stop that inflation that is hurting you so much by hurting you even more. The reality is that the economy is pretty weak already and I don't really think it's a good idea for the Fed to be hiking aggressively.
GERSH: If it sounds like the Fed is in a bit of a bind without an easy option, that's because it is. And Harris says that means Fed Chairman Ben Bernanke and his colleagues will risk appearing a bit weak.
HARRIS: They look a little bit like a 98-pound weakling here right now, but they are not powerless. We need to be kind of patient around this. The Fed can't turn a commodity driven inflation quickly.
GERSH: For this week though, Harris expects the Fed act like that 98- pound weakling, talking tough on inflation, hoping it won't have to back that up with action. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
