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June 08, 2006

Is it too hot or too cold?

Is the economy too hot or too cold? This is a question facing the Federal Reserve as it decides what to do about interest rates. N.C. State University’s Mike Walden considers the current economy’s temperature.

“Unfortunately for the Fed, it seems to be a mixture,” says Dr. Walden, an economist with the North Carolina Cooperative Extension Service. “We have hot elements like economic growth – very strong in the first quarter; factory production, up; profits, up. Prices are also rising.

“But on the other hand we have some cold elements: The housing market is clearly slowing nationally
Wealth growth is slowing. And retail sales outside of gas are also going down

“So this leaves the Fed in sort of a quandary, because they don’t have clear signals about the economy,” Walden adds. “If they try to cool down the economy and it is already cooling off, there is the danger it will go in the deep freeze of a recession.

“On the other hand, if the economy is too hot and the Fed doesn’t act, then we could get even higher inflation rates.

“So these are tough decisions for policy makers on the Federal Reserve.”

Posted by deeshore at June 8, 2006 08:00 AM