widely expected, the US Federal Reserve has kept the target
federal fund rate at 5.25 per cent at its policy meeting
yesterday. Stock and bond prices rallied after the Fed
changed the language of its policy statement, which analysts
and traders have interpreted as a more neutral policy
stand. The changes have also raised hopes that the Fed's
next policy action would be a rate cut.
Fed, in its previous statements, has been maintaining
that further rate hikes would be dependent on economic
data. In yesterday's statement, the phrase 'any additional
firming' has been dropped. It says, 'future policy adjustments
will depend on the evolution of the outlook for both inflation
and economic growth, as implied by incoming information'.
Most economists believe that this change in language is
indicative of a change in policy bias from further tightening
towards a neutral stand.
latest policy statement is less optimistic on US economic
growth. While the recent economic indicators have been
mixed, the housing sector adjustment is still ongoing,
the Fed said. Till recently the Fed was hopeful that the
housing sector would stabilise shortly and may even recover.
Despite the positive data on February new housing starts,
the US housing sector is still quite a long way from recovering
as prices still remain subdued. Mortgage lenders would
continue to face pressure, unless housing prices stabilise
or interest rates come down.
Fed has not yet given up on a soft landing for the US
economy. 'Nevertheless, the economy seems likely to continue
to expand at a moderate pace over coming quarters', the
parts of the statement confirm that the Fed is still very
concerned over inflation, which would mean that financial
markets may be hoping too much too soon. The statement
has maintained that recent inflation data has been 'somewhat
elevated'. Like in previous statements, the Fed says 'high
level of resource utilisation' has the potential to sustain
inflation pressures. In view of these factors, the Fed's
'predominant policy concern' remains the risk that inflation
may not moderate as expected.
it is accepted that factors fuelling domestic inflation
in the US have become more subdued, the risks of another
up trend in prices remain. Oil prices have been range
bound in recent months, but may rise if heating demand
increases as predicted because of colder weather conditions
this year. Replenishment of oil inventories which are
nearing 10-year low and fresh additions to US strategic
oil reserves would also increase demand this year.
US job market is yet to show any clear signs of a down
trend. Steady wages should keep consumer demand from falling,
unless there is a substantial rise in retail fuel prices.
Though US corporate demand has shown some signs of slack
in recent months, it would revive easily if consumer demand
factors make it entirely possible that US inflation does
not decline as expected. If that happens, the Fed would
not contemplate a rate cut this year as hoped by many.