Financial Markets

TITLE: Fed Cites Energy, Housing Declines In Holding Rates

REPORTER: Greg Ip

DATE: Sep 21, 2006

PAGE: A1

LINK: http://online.wsj.com/article/SB115876447709968910.html?mod=djem_jiewr_em

TOPICS: Monetary Policy

QUESTIONS:

1.) What policy action did the Fed decide on at its last Federal Open Market Committee Meeting?

The Federal Reserve left its short-term interest rate target at 5.25% for a second consecutive meeting.

2.) What is happening to long-term interest rates lately and what does the Behavior of long-term interest rates imply about expected future Fed policy?

Fed officials expect core inflation to move back below 2% over the next two to three years as energy prices stop boosting the prices of other goods and services and the economy cools. If that forecast doesn't unfold, it could pose a threat to the Fed's credibility that would require higher interest rates.

3.) Why did the Fed keep interest rates unchanged if the core inflation rate is above the Fed's "comfort" zone?

The Fed remains focused on inflation risks in large part because core inflation is above the 1% to 2% "comfort zone" of many Fed officials, including Chairman Ben Bernanke. In the 12 months through August, core inflation was 2.8%, up from 2.7% in the 12 months through July. Using a lesser-known price index that the Fed prefers, core inflation was 2.4% in the 12 months through July.

4.) What two factors were cited in the article for why the Fed decided to keep interest rates unchanged?

The Fed's continuing