By Jonathan Lansner (OC Register)

Whoever said things were slow in the summer hasn’t talked to the Federal Reserve lately.

The nation’s central bankers juggle their interest rate policies against conflicting fears – sinking housing’s impact on a weak economy vs. looming inflationary pressures (think four-buck gasoline.)

The Fed next meets Tuesday. We checked in with five local folks to hear what they thought the Fed – which last time made no rate cut for the first time in 10 months – might do.

Professor Joe Magaddino at Long Beach State:

The Fed will sit tight for the time being. A quarter-point rate increase is not beyond the realm of possibility but would largely be symbolic. If crude prices continue to ease, the Fed has some breathing room. I don’t think that you will see rates rise until the economy starts to improve, in the latter part of 2009. The credit crunch problem does not appear to be over. For monetary policy to work, we need a well- functioning financial system. Despite the best efforts of the Fed, that does not appear to be the case. As long as core inflation remains near the acceptable band, the Fed can be patient. The best metaphor I read is that to worry about commodity-induced inflation in light of the credit problems is a little like complaining to the firefighter about water damage while he tries to put out your house fire.

Lender Robert Satnick of Prime Financial, chairman of California Mortgage Bankers Association:

They will most likely sit tight until the first quarter of 2009 at the earliest. The economy is currently too weak and fragile. The consumer is hurting from rising food and energy prices, the high price of oil and the weakness in the housing sector. The Fed will basically remain on hold so as not to exacerbate the current problem. With respect to how they will juggle the need to help housing vs. inflation fears, the government will continue their backing of Fannie Mae and Freddie Mac in order to sustain confidence and liquidity. By continuing to keep rates low and not hiking them in the near term, more borrowers will be able to qualify for financing. Additionally, they will continue to allow bankers to borrow funds by pledging an increased spectrum of mortgage backed securities.” Professor Lisa Grobar, Long Beach State: The Fed will most likely sit tight, neither raise nor lower interest rates in the next meeting. Inflation is definitely a concern, and something that the Fed needs to watch closely. However, the recent easing in oil prices gives the Fed a little more leeway on the inflation front, while the news concerning housing markets and the macro economy continues to be poor. As a result, I think it is too early for the Fed to think about tightening in response to inflationary pressures. As far as housing goes, I don’t think we are quite through the worst of it. Foreclosures should peak sometime around the end of this year. As a result, we could still see more trouble in the financial industry as the fallout from these foreclosures continues to build. However, once we pass that peak period, conditions in housing and financial markets will begin to significantly improve – probably around mid-2009. At that point, the Fed may have to turn its attention to inflation, and rate hikes may be necessary.

Money manager Chip Hanlon at Global Delta:

In predicting what the Fed will do, the futures market is usually correct. So investors shouldn’t expect a surprise rate hike at this meeting. Futures say 96 percent odds of no move. Too bad. What the economy could use most right now is for the Fed to break the back of the spike in commodities prices we’ve seen this year. The stronger U.S. dollar that would likely result from a Federal Reserve tightening cycle would help do the trick. Unfortunately, doves on the (Fed) don’t want to raise rates because they worry about tight credit market conditions. However, if it made an ounce of sense to think that today’s 2 percent Fed Funds rate were somehow the cause of tight credit markets, then the doves should be arguing to cut rates next week, shouldn’t they? In reality, of course, it wouldn’t matter if they cut the Fed Funds rate to zero because an entire homebuying class has already been erased: the subprime borrower. While the housing market is going to complete its correction regardless, the inflationary genie is fully within the Fed’s control; let’s hope (Fed Chairman Ben) Bernanke and company will wake up to the evidence all around them and start raising rates before year-end to control inflation and, heaven forbid, maybe even encourage folks to do a little saving!

Professor Kerry Vandell at UC Irvine:
The primary two events that have occurred since the Fed last met have been (1) the latest credit liquidity crisis in the financial sector (including Freddie and Fannie), followed by slight recovery after regulatory and legislative reforms, and (2) a clear continuing deterioration of the economy which is spreading more broadly. The fragility of the economic situation is such that the Fed cannot afford to raise rates at this time, in spite of inflationary pressures from various sectors. The Fed governors are aware that all inflation is not the same in terms of policy prescriptions. Demand-pull inflation is not the same as cost-push inflation; aggressively restrictive monetary policy in the latter case is much riskier in terms of downside consequences. I still believe rates will not be increased until the spring, and that will depend on clear signs of economic recovery.