The financial markets waited, as is their wont, with bated breath. Then, on the afternoon of May 20, they got the good news: The Federal Reserve's policy-setting Open Market Committee had opted to leave the key federal funds rate unchanged at 5.5%. Way to go, Alan! There's nothing happening in this economy that merits a rate increase right now: wages are well-behaved, companies have little pricing power, and economic growth is strong--but far from overpowered. It's a new world and a new economy.
The Fed's inaction holds out hope that even that august institution is coming around to the BUSINESS WEEK view that information technology is now driving the business cycle, spuring productivity and growth without fueling inflation. Six years into a healthy expansion, you'd expect central bankers to adopt a tough anti-inflation stance reflexively and start tightening the screws on the economy. This time around, officials at the Fed seem convinced that course isn't warranted. We suspect the chairman persuaded his fellow policymakers that the 25 basis points' worth of insurance they bought on Mar. 25 is more than enough for the time being, especially now that growth is slowing.
It's only right that the Fed stay on the sidelines for now. After all, it's not the Fed that makes the economy grow over the long haul--businesses and workers do that. The U.S. has a strong, vibrant economy today, but that's not because the Fed forced businesses to restructure, companies to compete, and workers to work harder. It's because the Fed laid the groundwork of monetary vigilance, then stepped back and let the forces for growth do their job. That, more than anything else, is what we ought to be congratulating the Fed for doing right now.