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Mon, Aug 07, 2006 - Page 10 News List

Economists expect Fed to halt hikes

BREATHER?Most Fed watchers believe that data such as weaker GDP growth will prompt the bank to keep interest rates at the current level

AFP , WASHINGTON

The US Federal Reserve has been driving up US borrowing costs ever since June 2004. That could be about to change, economists believe after compelling evidence that the US economy is hitting the brakes.

The central bank's Federal Open Market Committee (FOMC) meets tomorrow to decide whether to continue with 17 straight hikes that have pushed the headline US interest rate up to 5.25 percent.

If the majority of Fed-watchers on Wall Street are correct, Chairman Ben Bernanke and his FOMC colleagues will decide that enough is enough, after rates had sunk to historic lows in response to a 2001 recession.

"We look for them to leave the rate unchanged for a long period and not just a short-term pause," Societe Generale economist Stephen Gallagher said.

"The Fed has been on the fence, faced with higher inflation and slowing growth. The desire has been to pause, provided inflation and inflation expectations could stabilize," he said.

"This [Friday's] employment report adds to softening evidence on the economy and will restrain inflation expectations," Gallagher said.

In the last big piece of economic news before the FOMC session, the government said on Friday that US employers added just 113,000 new jobs last month, while the jobless rate ticked up to 4.8 percent from 4.6 percent in June.

It was the fourth straight month that the Labor Department's "non-farm payrolls" report had proven tepid. Most worrying for an economy driven by consumer spending, retailers are proving most reluctant to take on new staff.

Slower consumer spending on the back of a cooling property market was to blame for second-quarter growth slipping to 2.5 percent, after GDP expanded at a red-hot pace of 5.6 percent in the first three months.

"Weak second-quarter GDP growth, and a smaller-than-expected gain in July's payroll employment, mean that the Fed is likely to take a breather at Tuesday's FOMC meeting," Global Insight chief economist Nariman Behravesh said.

"However, all the inflation indicators are flashing yellow and may soon be flashing red," he said.

"The Fed's statement on August 8th will continue to leave the door open for further hikes -- or cuts -- if necessary," he said.

Because of a startling rally in the commodities markets, US businesses are now being forced to pass on price increases to their customers as they themselves pay more for their supplies and raw materials.

Years of productivity growth helped to keep a lid on inflation, but now wage pressures are clearly building, as shown by a 0.4 percent increase in average hourly earnings that was outlined in Friday's jobs report.

Bernanke, however, has said that he believes cooling growth should curb inflation in the coming months, despite the wage pressures and high energy prices.

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