WASHINGTON – The 7-percent drop in U.S. stock indexes since July 19 may have worried investors, but it seems unlikely to change the substance of what Federal Reserve Chairman Benjamin S. Bernanke will say after the Fed’s governors meet tomorrow, according to a Bloomberg News story. In fact, Fed observers expect that the central bankers will respond to the latest turmoil in the financial markets just as they did earlier this year – with a change in style versus substance.
“This episode of turmoil is not enough to alter Fed policy,” Laurence Meyer, a former Fed governor who is now vice chairman of St. Louis-based Macroeconomic Advisers LLC, told Bloomberg News. He expects that the Fed will maintain the target for the federal funds rate at 5.25 percent through the end of 2008.
The board seems likely to admit that risks to economic growth have increased due to the recent rout in the stock and credit markets, said observers, an approach that it took following its March meeting. But without a change in interest rate posture, Bernanke will not lose his credibility as an inflation fighter. At the same time, steady interest rates may hurt the economy’s ability to recover from first-half GDP growth of less than 2 percent.
“The chances of a recession have now risen to 45 percent,” said Lyle Gramley, a former Fed governor who is currently a senior economic adviser at the Stanford Group Co. in Washington, D.C., as the continuing housing slump spills over into slowing consumer spending. For instance, auto sales in July were at their lowest level for the month in nine years.
