WASHINGTON - Straddling risky economic crosscurrents, the Federal Reserve is expected to stand still this week on interest rates.
Fed Chairman Ben Bernanke and his colleagues, who open a two-day meeting Tuesday, are in a tricky spot: they are faced with stuck-in-a-rut economic growth along with inflation threats from rising prices for energy, food and other commodities.
Fed officials have made clear that because of concern about inflation, they’re not inclined to cut rates further. At the same time, they have recognized that pushing rates up too soon could undermine an economy buffeted by housing, credit and financial woes.
“These are very challenging waters to have to navigate,” said economist Richard Yamarone.
The Fed is almost certain to hold its key interest rate steady at 2 percent when it wraps up its session on Wednesday. If that’s the case, 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 loans.
Investors and a few economists believe inflation problems might force the Fed to start boosting rates in August or later this year. However, many others think that’s a situation the Fed would like to avoid — especially given that the housing market is still flailing and foreclosures are at record highs.
Mortgage rates are already rising — spurred higher by investors’ concerns about inflation. “It’s an extremely hard place for the Fed,” said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School of Business.
So what’s the Fed to do?
“Tread lightly on rates and carry a big rhetorical anti-inflation stick,” said Ken Mayland, president of ClearView Economics.
In a string of speeches over the past few weeks, Bernanke and his colleagues have been doing just that. They’ve ramped up their tough anti-inflation talk to rein in inflation expectations of consumers, investors and businesses. If those groups think prices will keep on rising, they’ll act in ways that can worsen inflation.
And, Bernanke, in a rare public utterance for a Fed chief, sounded a warning against the slide in the U.S. dollar contributing to an unwelcome rise in inflation. He sought to use words — versus action — to bolster the dollar and try to lessen inflation pressures.