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Mon, Aug 06, 2007 - Page 10 News List

Fed expected to keep rates level

SIGNS OF LIFE The world's largest economy expanded at a 3.4 percent rate in the second quarter compared with a 0.6 percent crawl in the first quarter of the year


The US Federal Reserve is widely expected to keep interest rates on hold at its meeting tomorrow despite increasing anxiety over the US' troubled housing and mortgage markets, economists said.

Ten members of the Federal Open Market Committee (FOMC), including Fed Chairman Ben Bernanke, will have more than usual to mull as they convene inside the central bank's Beaux-Arts style headquarters in Washington.

In the past week, US stock markets have oscillated wildly, fears about the multitrillion-dollar mortgage market have mounted, Wall Street bankers have fretted about a related credit crunch, and the government has reported slower job growth.

Such turmoil alone would be enough to give Fed policymakers a headache, but they are also having to keep a close watch on inflationary risks triggered by spiking crude oil prices.

However, it is not all doom and gloom.

The world's largest economy has picked up speed, expanding at a 3.4 percent rate in the second quarter compared with its 0.6 percent crawl in the first three months of the year.

As such, most Fed-watchers believe the central bank will keep its short-term federal funds rate anchored at 5.25 percent in the coming week, where it has sat for 13 months.

"The FOMC is widely expected to leave rates unchanged at its meeting," Societe Generale economist Stephen Gallagher said.

Gallagher said he will be waiting to see, however, if the FOMC tweaks any of its observations of the economy in an accompanying policy statement.

Some economists believe the Fed may refer to the instability triggered by mortgage and credit worries, which has rocked US and global stock markets.

The leading Dow Jones Industrial Average plunged over 200 points, or over 2 percent, last Friday, closing at 13,181.91 as investors' fears increased.

"We expect the Fed to keep rates on hold at 5.25 percent and reiterate its anti-inflation bias, but also acknowledge recent volatility in financial markets," Lehman Brothers's analysts said in a briefing note to clients.

Recent news has suggested the worse of the housing downturn, which has also afflicted mortgage lenders, may not be over.

US home sales fell much more heavily than predicted in June, to their lowest level in more than four-and-a-half years.

And American Home Mortgage, one of the country's largest home loan lenders, said on Thursday it had scaled back its business dramatically because of housing and credit woes. The firm also said it was slashing around 6,000 jobs.

The outlook on the job front, however, became cloudy last Friday as the Labor Department said US job growth slowed much more than expected in last month, as 92,000 new posts were created.

This will not make the FOMC's decision any easier, but some analysts believe pressure is building on the central bank to throw the economy some relief.

"The Fed could cut interest rates as early as the September 18 meeting of the FOMC," said John Lonski, a chief economist at Moody's Investors Service.

Lonski agrees the Fed will likely stand firm tomorrow, but he said the likelihood of a rate cut "is now significantly greater than a hike."

Other economists believe the Fed might continue sitting on the fence for the rest of the year or longer until policymakers feel inflation threats have fully subsided.

Central bankers often opt to cut interest rates when housing markets stumble to aid hard-pressed homeowners, but persistent inflation concerns, particularly energy costs, have stopped the Fed lowering rates in the past 12 months.

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