Home / World Business
Mon, Mar 21, 2005 - Page 12 News List

Analysts disagree on course of US Fed

TURNING POINT?Experts agree that the US central bank must decide if it can continue its recent policy of ``measured'' rate hikes, but can't agree what the decision should be

AFP , WASHINGTON

The Federal Reserve, widely expected to bump up key interest rates another quarter-point tomorrow, must soon come to grips with whether it can continue its path of "measured" rate actions, analysts say.

A volatile mix of surging commodity prices that are stoking inflation along with sluggish global growth and a sagging US dollar may force the Fed to shift gears at some point -- although analysts are divided on the future course of action by the central bank.

The Federal Open Market Committee, the central bank's policymaking arm, is expected to lift the federal funds rate by 25 basis points for the seventh time in as many meetings to 2.75 percent tomorrow.

This is part of the trend of gradual or "measured" rate hikes signaled by Fed chairman Alan Greenspan, who is trying to push interest rates back to a more neutral level after a long period of "accommodation," or stimulus for a weak economy.

Experts say the Fed can maintain this policy as long as the economy remains on a moderate growth track and inflation stays tame at the "core" level, excluding food and energy costs.

"The Fed will stay on that track unless there is something dramatic to push them off," said Diane Swonk, chief economist at Mesirow Financial in Chicago.

"You would need something on the downside to make the Fed pause or a big acceleration to make them push up rates more rapidly."

The world's largest economy grew a robust 4.4 percent last year with relatively mild inflation.

But with oil prices hitting record highs and commodity prices surging, the impact on growth remains uncertain.

Some economists see a slowdown on growth as high energy costs kick in, which might lead the central bank to pause in its tightening cycle. Others argue that the inflation risks will force the Fed to accelerate its moves on rates, and that the "measured" language keeps the central bank hamstrung.

"The so-called `measured language' is blunting the effort to unwind accommodation at a time when inflation uncertainties are rising," said Citigroup's Robert DiClemente. "Conditions in the economy are telegraphing a change sometime fairly soon."

"The Fed is more worried about inflation than about an economic slowdown," said Kathy Bostjancic, senior economist at Merrill Lynch. "You can see that in their comments and speeches."

This "suggests a more hawkish tone by the Fed" that have prompted the futures market to price in a 30 percent chance of a half-point rate hike at the June meeting.

Bostjancic said Greenspan is trying to eliminate complacency in financial markets, and that one way to do this would be to change the language of the FOMC statement to take out the word "measured."

"This would introduce some flexibility for the Fed," she said. "They could go to 50 basis points or they could pause."

Some analysts the Fed may end its used of "measured," but that to avoid spooking financial markets, will also remove the word "accommodative" from its policy, to suggest that the rate-tightening cycle is nearing an end.

"When it does eventually drop the pledge of a `measured' pace to rate hikes, it will also likely axe the description of rates as still `accommodative,' thereby indicating at the same time that it isn't as clear that there is a lot more to go, and taking the sting out of the wording change," said Avery Shenfeld at CIBC World Markets.

This story has been viewed 2781 times.
TOP top