Fri, May 11, 2007 page10

• Fed firm on rates despite analysts' doubts

  FINGERS CROSSED Investors are hoping for an interest rate cut, but many analysts say the US central bank will keep rates right where they are through most of this year

  • AFP AND AP
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  The Federal Reserve's decision to extend its long pause on interest rates signals confidence that the US economy will soon emerge from a soft patch, despite doubts by some forecasters, analysts say.

  The central bank's Federal Open Market Committee (FOMC), in a unanimous decision on Wednesday, kept its federal funds rate steady at 5.25 percent, where it has been since last June.

  The Fed's decision means that commercial banks' prime interest rate -- for certain credit cards, home equity lines of credit and other loans -- stays at 8.25 percent.

  The FOMC, headed by Fed Chairman Ben Bernanke, said inflation remains the "predominant policy concern," and despite a period of subpar growth, "the economy seems likely to expand at a moderate pace over the coming quarters."

  The panel kept its options open by retaining the phrase from its March statement that "future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

  Analysts said the statement suggested the Fed was content with the cooling in US economic growth induced by a series of rate hikes through last June, and that the central bank growth outlook remained optimistic, perhaps too much so.

  On Wall Street, the Fed's action and views about the US economy gave stocks a lift.

  The Dow Jones industrials gained 53.80 points to close at 13,362.87, a record.

  Investors are craving an interest rate cut. But many economists believe the Fed may keep rates right where they are through most -- if not all -- of this year.

  Avery Shenfeld, senior economist at CIBC World Markets, said the Fed appears "more confident than might be warranted" in the US growth outlook.

  Shenfeld said that financial markets pricing in a rate cut "have it right that the economy might need a bit of a nudge to get moving again" in the form of a Fed easing later this year.

  The Fed's official forecast was for US economic growth in a range of 2.5 percent to 3.0 percent this year, despite a sluggish 1.3 percent pace in the first quarter.

  But some private economists see a weaker pace of growth and the IMF has pegged US growth for the year at 2.2 percent.

  Joseph LaVorgna, senior economist at Deutsche Bank, agreed that the Fed is satisfied with the slowdown, which has had enough "offsets" from the weak housing market to keep the economy growing.

  But he maintained that "as the year progresses and the economy shows further weakness, the Fed will want to make a small rate cut just to assure a soft landing."

  Some Fed watchers say Bernanke and his colleagues are carefully avoiding any hint of a rate cut.

  "While the Fed acknowledges the ongoing economic deceleration, it does not see downside economic risks as paramount at this time," said Peter Kretzmer, the senior economist at Bank of America.

  Stephen Gallagher, economist at Societe Generale, said he is almost ready to abandon his forecast for a Fed rate cut, saying "time is running out" for the Fed because of the lag required to stimulate the economy.

  "We have looked for two rate cuts to support the economy when growth was below trend and risks seemed to be high," Gallagher said.

  "Modest rate cuts as inflation slowed seemed a natural Fed response to contain risk and maintain liquidity in the financial markets. Growth is sluggish, but the downside risks for later this year are fading as housing trends bottom. Meanwhile inflation, particular service prices, are stubborn and slow to turn," he said.
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