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KAI RYSSDAL: We got a nice look in the economic rear-view mirror from the Commerce Department first thing this morning, and then the considered professional opinion of the Federal Open Market Committee this afternoon. First things first, the economy grew at a rate of .6 percent January through March, exactly the same rate of growth as the fourth quarter of last year. Not to get all wonky on you here, but the old school definition of a recession is two quarters of negative GDP in a row, which would seem to settle the debate over the R-word, but then this afternoon, the Federal Reserve did exactly what everyone thought it was going to do, cut short-term interest rates .25 percent, and in the process said some not-so-reassuring things.
Our Washington bureau chief, John Dimsdale, has the story.
JOHN DIMSDALE: Justifying its seventh rate cut since September, the Federal Reserve said economic activity remains weak. The board acknowledged that inflation has been on the rise in recent months. Fear of inflation prompted two of the 10 board members to vote against another interest rate reduction, but economist Jack Albertine says a majority still have faith the economy will take care of inflation by itself.
JACK ALBERTINE: The Fed believes that inflation’s not going to get out of control, as long as the economy is limping along at the kind of rate we’re seeing, so I don’t think the Fed is overly concerned about inflation. I do think that they’re worried that the economy could deteriorate further, and that’s why we had this interest rate reduction.
Inflation hawks had hoped for a signal the Fed is now ready to pause its rate reductions. Instead, the Fed left the door open for more cuts in the future, but Diane Swonk, of Mesirow Financial, sees some subtle hints that this may be as far as they’ll go.
DIANE SWONK: The Fed is not as worried going forward about the economic weakness persisting as much. The downside risk has sort of been dropped a bit, and the Fed also really emphasized how much they’ve already put into this system, so there’s sort of a sense that the Fed is shifting gears here. It’s one step towards a pause.
Despite signs of inflation, especially in grocery stores and at gas pumps, analysts say the Fed’s number one worry is something else. They say the Fed fears the banking system hasn’t finished unraveling in the wake of the subprime mortgage meltdown.
In Washington, I’m John Dimsdale for Marketplace.
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