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Thu, Dec 15, 2005 - Page 12 News List

Federal Reserve hints at end to rate-hike policy

FENCESITTING?As Alan Greenspan prepares to retire, the US central bank indicated there might be one more hike, but left his successor some options

AFP , WASHINGTON

In the sort of balancing act that has made its outgoing chairman Alan Greenspan famous, the Federal Reserve is hinting at an end to its rate hike campaign while keeping the door open to more increases.

Analysts said the latest meeting Tuesday of the US central bank's Federal Open Market Committee (FOMC) left options on the table for Greenspan's heir apparent, top White House economic adviser Ben Bernanke.

As expected, the FOMC raised the benchmark Fed funds rate by a quarter point to 4.25 percent to keep a lid on inflationary pressure -- the 13th hike in succession.

The surprise came in the FOMC's explanatory statement which at first blush, signalled the Fed is preparing to call off its attack on price pressures.

The 10-member committee said "that some further measured policy firming is likely to be needed" to keep inflation in check.

Economists took that to mean that at least one more rate hike is in the works before Greenspan retires at the end of next month to cap an illustrious career as the world's most powerful central banker.

But in a noteworthy change, Greenspan's team deleted their description of monetary policy as being "accommodative." which they had used to fuel expectations of rate hikes stretching well into the future.

The net result was to leave most economists confident that US interest rates, which now stand at their highest level in four and a half years, will soon pause on their upward trajectory.

The question is when that pause will come. Some predicted another three hikes to take the Fed funds rate to 5 percent and so help Bernanke establish his inflation-busting credentials.

Joel Naroff of Naroff Economic Advisers predicted that the Fed funds rate would peak at 4.5 or 4.75 percent.

"But if inflation does keep moving higher -- and right now, that is a real possibility -- the committee is quite prepared to keep raising rates," he said.

"And it would not necessarily be at a `measured pace,' which is no longer an operative phrase," he said.

The FOMC statement said the US economic expansion "appears solid" despite high oil prices and hurricane disruptions. Core inflation remains contained, it said.

"Nevertheless, possible increases in resource utilization [the amount of slack in the jobs market and the manufacturing sector] as well as elevated energy prices have the potential to add to inflation pressures," it said.

"They are not done by a long shot," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi, highlighting the new focus on "resource utilization."

"In other words, if the unemployment rate continues to fall and capacity utilization moves up, that means the economic expansion is taking up slack resources and they are going to continue firming," he said.

"It is no longer true that the Fed will stop at neutral. They would rather have a slightly restrictive policy," he said.

There has been much debate about what constitutes a "neutral" level for US interest rates that balances out growth promotion with keeping inflation at bay.

Many economists have said that rate stands at around 4.25 or 4.5 percent, suggesting that monetary policy is now at or near that point.

But the politics of monetary policy is also at play. Greenspan did not want to handcuff his successor to a pre-ordained policy, according to analysts who see an element of fence-setting in the latest FOMC directive.

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