WASHINGTON, June 28 (AFP): The Federal Reserve concludes a two-day meeting today widely expected to hold interest rates steady and note signs of a rebound in the US economy, despite the persistent slump in housing, analysts say.
The Federal Open Market Committee (FOMC) headed by Ben Bernanke is likely to hold the federal funds rate at 5.25 per cent, where it has been for the past year.
More important for financial markets, say analysts, is the FOMC statement, which will include the Fed's latest outlook for the economy and inflation, and thus may provide clues on the Fed's next move.
In recent months, market expectations have shifted from the notion that the Fed is preparing a rate cut to stimulate a sputtering economy to a sentiment that a rate hike may be likely to stem inflation pressures.
But most economists say they see no imminent rate move in either direction.
Jan Hatzius, senior economist at Goldman Sachs, said recent data make it hard to know the direction of the economy.
"The recent economic data point to a 'tug of war' between a sharp pickup in manufacturing output growth and a continued nasty recession in the housing sector," Hatzius said.
The US economy decelerated in the first quarter to a sluggish 0.6 per cent growth rate, but many analysts are calling for a rise to a pace of 3.0 per cent or better in the second quarter.
Eugenio Aleman, economist at Wells Fargo Bank, said financial markets have pushed up bond rates in anticipation of higher inflation and economic growth, but that this could crimp an economic rebound.
"This (rise in bond rates) poses a serious problem for the economy, because any prospect of a housing market recovery seems further away in time," Aleman said.
"Meanwhile, the US economy, ex-housing, seems to be showing strong signs of recovery, which will prevent the Federal Reserve from lowering interest rates any time soon. This doesn't mean that there are no risks. In fact, I believe the risks for a downturn are higher today than what they were during the last two years."
Some analysts say the Fed appears vindicated for holding rates steady over the past year and highlighting inflation risks even as some analysts called for a rate cut.
"Previously we had predicted rate cuts in the third quarter of this year but have now changed that to a forecast of unchanged rates for the rest of 2007 because of reduced growth risks, a stronger business investment outlook and the healthy state of the financial markets," said Brian Hilliard, director of economic research at Societe Generale.
"We predict the first increase of 25 basis points in the first quarter of 2008 with rates then rising to 6.0 per cent before the end of the year."
Economists say the Fed has set an unofficial target to get "core" inflation within a range of a pace of one-to-two per cent although some experts say it may be hard to ignore food and energy prices not included in core rates. Recent data show core prices just above the Fed's "comfort" zone.
Some analysts say the US economy is not out of the woods yet, and may be brought down by the weak housing sector and a spillover from failures of "subprime" mortgages to people with patchy credit histories.
Lewis Alexander, chief economist at Citigroup, said a close analysis of prices suggests that wages and other key elements are largely in check.
"When you look at the broader drivers of inflation they don't particularly look out of hand," he said.
Fed seen holding steady, may fine-tune message on economy
FE Team | Published: June 29, 2007 00:00:00 | Updated: February 01, 2018 00:00:00
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