Behind Cheaper Credit, Inflation Fears Loom
The Federal Reserve Board's rate cut yesterday increased the chances that months of Fed moves could start to trickle down to homeowners in time to ease the pain when adjustable-rate mortgages reset this year. And people who borrow money to pay tuition, buy cars or cover unpaid credit card bills might eventually see some benefit.</br></br>But the Fed's action could also revive inflation, many economists fear. By reducing the interest rate financial institutions charge each other for short-term loans, the Fed makes money more readily and cheaply available. If it miscalculates, it can pump too much money into the economy, fueling excessive demand for goods, housing and capital spending -- and driving up prices.</br></br>That would undermine Fed Chairman Ben S. Bernanke's long-cherished notion of setting a low, narrow and predictable target range for inflation. Through higher consumer prices, all Americans would effectively help pay for the rescue of the financial industry. The decline in housing prices might be tempered, but inflation would eat away at real housing values.</br></br>"The good news is that this will take pressure off of housing prices," said Kenneth Rogoff, an economics professor at Harvard University. "The bad news is that it will be very painful to squeeze the inflation out of the system when this mess is all over."</br></br>The threat of inflation was evident in commodity markets yesterday. Though at historically high levels, prices for corn and copper rose on the expectation that the Fed rate cut would breathe new life into the economy and avert a drop in demand. Oil prices jumped more than $3 in New York to $109.42 a barrel.