Vindicated on economy, Fed likely to extend pause

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WASHINGTON, June 24 (AFP): Amid growing signs of a US economic rebound taking root, the Federal Reserve appears likely to hold interest rates steady again at its upcoming policy meeting, analysts say.
The central bank, which has consistently highlighted inflation dangers while playing down risks of an economic slump despite financial market expectations to the contrary, is expected to maintain that theme at its two-day meeting opening Wednesday.
The federal funds rate, at 5.25 per cent for the past year, is unlikely to be changed anytime soon, say Fed watchers.
"Absent a crisis or sudden shift in data trends, we still expect the Fed to stay on hold into 2008," said Joseph Balestrino, analyst at Federated Investors.
Balestrino said the Federal Open Market Committee had been steady in its assessment of conditions even while some private analysts had been fretting about a downturn that might call for a rate cut.
"Investors assumed the FOMC would cut interest rates in late 2007 or early 2008," he said. "Those same investors now have begun to factor in the possibility of an actual rate hike."
Ethan Harris, senior economist at Lehman Brothers said Fed chairman Ben Bernanke and his colleagues are still preoccupied with inflation even though one measure shows "core" prices at a 1.9 per cent pace-below the unofficial target of two per cent.
"The recent dip in core inflation is probably temporary," Harris said in a note to clients.
Harris said that aside from lower price pressures in home rents, "virtually every other driver of inflation-labour market and commodity tightness, weaker productivity growth, and rising global inflation pressure-points to upside inflation risks."
The economist said he believes the Fed is likely to formalise its inflation target of one to two per cent at some point this year to end doubts about its policy approach.
Although most analysts say the Fed's next move is likely to be a rate hike, some say the US economy is not yet out of the woods.
An International Monetary Fund report Friday said US gross domestic product growth should average just 2.0 per cent in 2007. Although the IMF said the economy appear to be recovering, it is "uncomfortably close" to the "stall speed" associated with past recessions.
The US economy expanded at a tepid 0.6 per cent pace in the first quarter, but most economists see an acceleration to a rate of 3.0 per cent or better in the current quarter.