Print

Mail

wiki links

US' Fed set to hike rates again

On Groundhog Day at the Federal Reserve, the scenario will be familiar: The central bank will once again announce a quarter-point rate hike, with reassuring words about the steady growth of the US economy.

The deja-vu scene will be reminiscent of the 1993 film Groundhog Day, in which the hero (Bill Murray) finds himself trapped in the same surreal routine each time he wakes up.

Coincidentally, the central bank policymaking arm wraps up a two-day meeting on Feb. 2 -- the day the fabled groundhog emerges from his hole in Pennsylvania and predicts, depending on whether he sees his shadow, if there will be an early spring or six more weeks of winter. At the Groundhog Day meeting, the Fed is expected to announce a quarter-point rate increase for the sixth consecutive time.

Since last summer, the Fed and its chairman, Alan Greenspan, have been on a steady path of quarter-point rate hikes, bringing the key federal funds rate to 2.25 percent at the end of the year from 1.0 percent in June.

And analysts are virtually unanimous in saying that the Fed is likely to repeat itself following a series of economic reports which show steady if less-than-spectacular growth.

"The upcoming Fed meeting could be one of the least interesting in recent memory. The futures market is fully pricing in a 25-basis-point hike," said Lehman Brothers economist Ethan Harris.

"There is also little reason for the Fed to change its language: `Output appears to be growing at a moderate pace,' `labor market conditions continue to improve,' and `inflation expectations remain well contained,' so `policy accommodation can be removed at a pace that is likely to be measured.'"

In the most significant data of the past week, the government said US economic growth cooled in the fourth quarter to a 3.1 percent annualized rate, the weakest in seven quarters, as the massive trade deficit weighed on the economy. This, however, led to gross domestic product growth for the full year of 4.4 percent, the fastest pace since 1999.

Other recent data showed rising durable goods orders, a positive sign for manufacturing, and increasing consumer confidence, which may mean steady spending.

Thus far, Harris said, the Fed moves to bring interest rates up from a highly stimulative level to a more normal rate have not derailed the world's largest economy.

"The Fed does not want to damage the economy," he said.

Federal Open Market Committee members "also probably recognize that the economy could not handle a normalization of financial conditions. But the Fed is unlikely to pause in its rate hikes until the markets take notice," he said.

With little mystery about the upcoming meeting, analysts are trying to gauge how far and how fast the Fed will go in its "measured" moves on interest rates.

Nariman Behravesh, chief economist at Global Insight research group, said the latest economic reports "validate the Fed's goal of slow, steady increases in interest rates," and predicted five more increases this year, to bring the base rate to 3.5 percent by December.

Behravesh said that despite the apparent cooling of growth, "the underlying components of the domestic economy continue to be strong."

He predicted that consumer spending may still grow despite concerns about overextended and debt-ridden Americans.

"If you look at the asset side and net worth, consumers are actually in pretty good shape," he said. "We don't draw the conclusion the US consumer is in dire shape."

But Paul McCulley, managing director at bond firm Pacific Investment Management Co, predicted that the Fed would soon end its tightening for fear of choking off economic growth.

"I think the Fed will stop between 2.5 percent and 3.0 percent," McCulley said in a speech to the Investment Analysts Society of Chicago.

The Fed "is not trying to shut this economy down," he said.
This story has been viewed 1742 times.