Federal Open Market Committee (FOMC) of the US Federal
Reserve which met yesterday raised the benchmark interest
rate by 25 basis points to 4.75 per cent per annum,
as expected. This is the 15th straight rate hike, all
by 25 basis points each, by the Fed from mid-2004 when
the rate was as low as 1 per cent.
meeting was the first under the new Fed chairman Ben
Bernanke. Those who were keenly waiting for any change
in policy or outlook under the new chairman would have
been disappointed as the Fed maintained its earlier
stand on interest rate outlook.
statement issued by the Fed clearly indicates that the
US central bank continues to be concerned about inflationary
pressures. "Possible increases in resource utilisation,
in combination with the elevated prices of energy and
other commodities, have the potential to add to inflation
pressures", the statement said.
US economy is expected to post strong growth for the
current quarter ending 31 March, 2006 on increased spending
to repair the hurricane damages. Unemployment rates
have come down considerably and are currently below
5 per cent.
a clear slowdown in the housing sector, consumer confidence
in the US for the month of March rose to a 4-year high.
However, inflation remains below 2 per cent even as
oil prices are hovering close to record highs.
growth has rebounded strongly in the current quarter
but appears likely to moderate to a more sustainable
pace", the Fed statement said. The US economy is
forecast to grow at an annual rate of 3.5 per cent this
year as compared to 3.1 per cent for 2005.
a clear indication of further rate hikes in future,
the statement said the FOMC "judges that some further
policy firming may be needed to keep the risks to the
attainment of both sustainable economic growth and price
stability roughly in balance." The committee "will
respond to changes in economic prospects as needed."
next FOMC meeting is scheduled for 10 May and most economists
and analysts expect another rate hike by 25 basis points
to 5 per cent per annum.
the big question is whether the Fed would stop at 5
per cent or go even further? Some economists believe
that interest rate would
be hiked to 5.5 per cent or even more by early next
year. Others expect the Fed to take a pause after touching
5 per cent, before resuming the rate hikes next year.