Fed seen standing firm as mortgage pain worsens

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WASHINGTON, Aug 5 (AFP): The Federal Reserve is widely expected to keep US interest rates on hold at its meeting Tuesday despite increasing against about America's troubled housing and mortgage markets, economists say.
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 per cent rate in the second quarter compared with its 0.6 per cent 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 per cent in the coming week, where it has sat for 13 months.
"The FOMC is widely expected to leave rates unchanged at its meeting," said Societe Generale economist Stephen Gallagher.
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 two per cent, Friday, closing at 13,181.91 as investors' fears increased.
"We expect the Fed to keep rates on hold at 5.25 per cent 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 over four and a half years.
And American Home Mortgage, one of the country's largest home loan lenders, said 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.
Fed officials have said in recent months that they do not anticipate the housing slump destabilising the broader economy, and consumer spending -- a vital motor of economic vitality -- appears to be holding up.
The outlook on the job front, however, became cloudy Friday as the Labour Department said US job growth slowed much more than expected in July, as 92,000 new posts were created.