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Mon, Oct 23, 2006 - Page 10 News List

Fed set to hold interest rates at 5.25%

WAIT-AND-SEE On Wall Street, market betting that the Fed will stay on hold has helped propel the Dow Jones index of blue chip shares over the 12,000 mark


Facing a murky economic outlook on the one hand and US elections on the other, the Federal Reserve looks set to hold interest rates steady this week.

The US central bank's federal open market committee (FOMC) will decide at its latest meeting, a two-day affair over tomorrow and Wednesday, to keep its headline rate at 5.25 percent, economists believe.

"There's no reason for them to do anything, expect stick to their wait-and-see policy," Global Insight economist Nigel Gault said.

"They still claim the economy is slowing but it is not clear by how much, so there's no urgency to cut interest rates," he said.

In August, the Fed called off a long-running campaign of hikes by standing pat for the first time in 17 meetings.

The world's biggest economy had slowed from a 5.6 percent acceleration in the first quarter to grow by just 2.6 percent in the second.

Data since then have suggested the economy is still flagging, but not by so much that the US is at risk of recession. Inflation, though, has remained stubbornly high for the Fed's liking.

Leading the way down for the US economy is the housing market, which is hitting the brakes hard after a years-long boom that did much to stoke consumer spending.

But for Lehman Brothers economist Drew Matus, "the Fed is uncertain about the ultimate impact of the housing correction."

Meanwhile over on Wall Street, market betting that the Fed will stay on hold for the foreseeable future has helped propel the Dow Jones index of blue chip shares over the 12,000 mark for the first time ever.

Overshadowing the Fed meeting is the Nov. 7 election for Congress. Opposition Democrats believe they have a fighting chance of retaking one or both houses.

Historically, the Fed has been reluctant to shift tack on monetary policy just before elections, unless its hand is forced by economic or market events.

"The Fed is in the fortunate position that economic factors argue for no change," Gault said.

"If economic data were pointing towards a rate hike, that would make things a little tricky for the Fed with the election just coming," he said.

In fact, most economists expect no change from the Fed for some time to come.

"The next move will be a cut, but I'm not looking for that until the middle of next year," Societe Generale economist Stephen Gallagher said.

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