Merrill To Fed: You're On An Unwanted Journey

By John S. McClenahen The Federal Reserve Board, specifically its Federal Open Market Committee (FOMC), is mistakenly worrying more about inflation than a slower-paced U.S. economy, believes Kathleen Bostjancic, a senior economist at Merrill Lynch & Co., New York. In the wake of the FOMC's decision last week to raise the federal funds target rate to 1.5%, "we are very concerned that the Fed is embarking on an atypical and unwanted journey of tightening rates during a period of decelerating economic and profit growth," she says. Elevated oil prices are not the only headwind buffeting the economy, she insists. "The consumer, which currently comprises 70% of the entire economy, faces a number of both structural and cyclical obstacles, including a low savings rate, high debt levels, higher debt service costs due to rising interest rates, sharply lower 'cash outs' from refis, a negative equity wealth effect, and [a] fiscal stimulus that has now turned to a drag."

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