WASHINGTON -- The Federal Reserve's interest rate increases could be over for the foreseeable future.
Credit luck on the energy front, in part. But a sinking housing market is also playing a prominent role, along with deep troubles in the automobile industry.
Falling oil and gasoline prices and the bursting of the housing bubble have helped the central bank and its relatively new chairman, Ben S. Bernanke, breathe a sigh of relief about those haunting fears of inflation he had harbored.
When the Fed meets today, economists predicted it most likely would make consumers happy by essentially doing nothing - announcing that it is holding interest rates steady. A month ago, many people thought another interest rate increase was all but certain.
Bernanke has been under pressure for months for his management of interest-rate policy after replacing Alan Greenspan. "I think things are coming his way right now," said David A. Wyss, chief economist at Standard & Poor's, the investment rating agency.
The economic situation Bernanke inherited from Greenspan is proving much more complex and difficult to manage than analysts thought.
Many analysts said it is possible that the Federal Reserve is finished raising interest rates in the current economic cycle. It took a pause at its last meeting on June 29 after 17 straight increases. The next interest-rate move could well be a decline, and that could happen in early 2007, said John V. Miller, head of municipal portfolio management for Nuveen Investments in Chicago. This would be good news for borrowers, who have seen interest rates rise on their home-equity and other adjustable lines of credit.
Thanks to declining oil prices that have pushed gasoline pump prices down and to tamer inflation at both the retail and wholesale levels, there is a more sanguine view about inflation at the central bank and in financial markets, too.
For instance, the Producer Price Index for August increased by 0.1 percent, the same as in July, the Labor Department said yesterday.
The core producer price, excluding food and energy prices, declined 0.4 percent in August after a 0.3 percent decrease in July.
But falling interest rates aren't always good news. Concern about the health of the economy is growing and could lead the Federal Reserve to ponder rate cuts.
Housing construction is plunging faster than most analysts had predicted, and the U.S. automotive sector is in a crisis, with both General Motors and Ford laying off thousands of workers. Both will serve as an economic drag in coming months.
Housing starts in August fell for the sixth time in seven months, and are now more than 26 percent below their peak in January, reported economists Brian S. Wesbury and Bill Mulvihill at First Trust Advisors LP in Lisle, Ill.
While the market is falling faster than they thought, they said housing starts are now back to more sustainable levels.
But others are concerned that the housing market's dive will be more severe and possibly take down the economy with it.
Michael Drury, chief economist at McVean Investments LLC, a futures trading firm in Memphis, Tenn., predicted that the housing market would drive the economy into a recession, prompting the Fed to begin sharply reducing interest rates again late this year or early in 2007.
He said the Fed's benchmark federal funds rate, which banks charge each other on overnight loans, will have to go to 3 percent or maybe even lower next year to cause the economy to bounce back. It is now at 5.25 percent.
Rather than inflation, the central bank could well be talking about the danger of deflation within a year, said Drury, who said he is one of a handful of economists with truly bearish sentiment.
Most analysts say that the economy will slow down somewhat from the housing declines, but will not sink into a recession.
Carl Tannenbaum, chief economist at LaSalle Bank in Chicago, said the housing sector "is cooling down, and some might be worried it might be cooling down too much." But he added that he saw a "moderation" of economic growth. "Certainly we are not in imminent danger of falling into a recession," he said.
Tannenbaum said he isn't sure the Fed is done raising interest rates, and that one more increase could be in the cards before it quits.
Brian A. Bethune, economist at Global Insight, an economic consulting firm in Lexington, Mass., said he saw the central bank keeping interest rates steady until late this year or sometime next year.
"The Fed is kind of in the catbird seat right now," he said.
William Neikirk writes for the Chicago Tribune.