The Federal Reserve is facing an especially difficult decision on rates as it gears up for its August meeting today. However, the Board will have the help of a new, fresh face to guide its decision-making. The FOMC made a last minute addition Tuesday, when it officially swore in Elizabeth Duke as a member, allowing her to participate in the meeting. Duke will both participate and vote at today's FOMC meeting.
The Senate confirmed Duke, whose nomination had been on deck for a year, on the eve of their Fourth of July recess. However, her addition precedes the retirement of Governor Frederic Mishkin, who will leave the FRB on August 31st to return to Columbia University.
Duke was nominated by President George W. Bush on May 15, 2007, and the Senate confirmed her on June 27, 2008. She now officially fills the seat of Susan Schmidt Bies, who resigned on March 30, 2007. Duke is the former chairman of the American Bankers Association, and she has also held high-level positions at Wachovia Corp. (WB) and Southtrust Corp. Her term on the FRB expires January 31, 2012.
While the Federal Open Market Committee is grappling with a slumping economy, with the labor market showing seven consecutive months of job losses, the dizzying ascent of oil and gas prices has raised serious concerns about the outlook for inflation.
Dean Baker, an economist with the Center for Economic Policy Research, thinks that the Federal Reserve will not raise rates, although he said, "the weakness will perhaps warrant it."
Economic Policy Institute economist Josh Bivens thinks that the FOMC will shift away from its inflation-centered meeting in June, which led to speculation that the Fed would raise rates at their August meeting. Rather, he suggests that the Fed should only raise interest rates if and when core inflation becomes a more serious threat.
"I'm a big believer in you only fire at inflation when you see the whites of its eyes," Bivens told RTT News. "Core measure has stayed steady."
The Federal Reserve has to choose between a mild recession now, or a deeper recession later, Former St. Louis Federal Reserve Bank President William Poole said in mid-July.
Poole said that the Fed should begin to tighten interest rates "earlier rather than later," although he indicated that he would not hike rates at this week's meeting.
Philadelphia Fed President Charles Plosser, who is currently a FOMC voting member, suggested in a July 22 speech that more attention should be paid to headline inflation, which includes historically volatile food and energy prices. Currently, the Federal Reserve focuses on core inflation when determining the federal funds rate.
"I don't believe we can be sanguine that the behavior of core inflation will keep the public's inflation expectations well-anchored in the face of persistently high headline inflation," Plosser said in prepared remarks. "To keep inflation expectations anchored means that monetary policymakers will have to back up their words with action."
However, Plosser's suggestion received criticism from Bivens.
"I think he's kind of flat wrong," Bivens said. "The only way you use the headline number is if you're quite convinced that it is inevitable."
The Philadelphia Fed President appeared less concerned about economic growth, noting that the Federal Reserve's "accommodative" approach to monetary policy has "ensured" that economic growth will return to its long-term goal in 2009. For the rest of 2008, he called for "continued sluggish growth and weakness in the labor markets," with an increase in the unemployment rate.
Although Plosser's comments were notably hawkish, they came before a slew of negative economic data that has led many experts to believe that the Federal Reserve will once again keep rates steady.
Inflation is not a serious enough threat to make the Federal Reserve raise interest rates, Bivens said, adding that he believes the FOMC will use the meeting to point a "laser on the weakened economy."
Bivens noted that core inflation has remained relatively subdued, considering the spike in headline inflation. However, a spike in energy and food prices has been behind the rising headline inflation, and Bivens noted that "higher interest rates don't help oil and food price inflation."
Some members of the FOMC have expressed concern that a wage-prices spiral could rear its ugly head, due to the strains being placed on the American worker. However, wages are currently lagging behind inflation, and Bivens believes that the weak labor markets will work against the spiral as they reduce the bargaining power of the U.S. worker.
Baker told RTT News that, even if the Federal Reserve does cut rates, it might not do much to help the economy.
"It's not clear to me that cutting would help that much," he said. "The dollar is going to fall in response to a rate cut. …I'm not sure that cutting the federal funds rate is going to provide a stimulus."
Raising interest rates "might tip the economy over into a shallow recession," Poole said, but emphasized that was the lesser of two evils.
"If the inflation gets going, the Fed is going to have to respond in a more Draconian fashion later, so the issue there is: Would you rather have a mild recession now or inflation and a bigger recession later?" he asked.
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June 05, 2026 16:18 ET A busy week for economic news flow saw a slew of reports being released that reflected the trends in the U.S. labor market. In Europe, economic growth and inflation data gained attention as the European Central Bank and Bank of England head for policy session later in the month. In Asia, the monetary policy session of the Indian central bank was in focus as the country, a major oil importer, reels under the pressures of a weaker rupee and rising inflation.