Fed Holds Key Rate at 2 Percent; Notes Risk of Inflation

It’s an issue that’s critical for mortgage market participants — which direction the economy heads in the remainder of 2008. On Wednesday, the Federal Open Market Committee held its target for the federal funds rate at 2 percent, noting that while risks to economic growth remain, inflation is looming as a potentially more difficult challenge. “Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased,” the Fed said, nodding to increased worry among investors over potentially spiraling inflation. Even Warren Buffett sounded the alarm on the issue Wednesday. “Inflation is really picking up,” he said. “Whether it’s steel or oil… we see it every place. It’s exploding.” Not exactly the stuff of comfort for investors, but still less acerbic than the stark take of Andrew Liveris, chairman and CEO of Dow Chemical Co. (DOW), who remarked on Wednesday that “there’s very few levers left” for Bernanke and the Fed. “There’s a real risk here and we’ve got stagflation,” he said in an television interview on PBS Tuesday evening. “You can only break out of it one way and you better take on inflation head-on.” Liveris assessment of stagflation — meaning inflation during a period of economic stagnation — was supported at least in part by the Fed’s own statement, which said that “labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.” But the Fed also noted that “overall economic activity continues to expand, partly reflecting some firming in household spending.” Stocks ended an erratic day largely higher on the news Wednesday, with the S&P 500 rising nearly 8 points to 1321.97; the Dow Jones Industrial Average also rose ever so slightly, up 4.4 points to close at 11,811.83. Disclosure: The author wheld no positions in DOW when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.