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US Fed leaves rates unchanged; cautious on inflationnews
Rex Mathew
26 October 2006

As widely expected, the US Federal Reserve has left key interest rates unchanged for the third consecutive time. The Federal Open Market Committee (FOMC), the US central bank's interest rate setting body, has left the Fed rate at 5.25 per cent at its meeting yesterday. This level has been maintained since June this year, when the Fed ended a rate hike cycle that saw the Fed rate hiked consecutively for 17 times by 25 basis points each.

As in the previous two meetings in August and September, the decision to hold interest rates steady was not a unanimous one. One member of the FOMC voted for a 25-per cent hike in the Fed rate.

The statement issued by the Fed is almost unchanged from the previous two meetings. The Fed remains cautious on inflation, though US economic growth has slowed down. "Readings on core inflation have been elevated, and the high level of resource utilisation has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand", the statement said.

The only change from the September statement was the removal of high energy prices and commodity prices as potential factors that could lift inflation.

The Fed continues to believe that the US economy would have a soft landing. "Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace", the statement added.

Fed chairman Ben Bernanke and his team continue to keep policy options open. As some inflation risks remain, rate hikes may be required in future. "The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information", the Fed said in the statement.

However, most economists and analysts believe that the Fed would keep interest rates steady in the near future. The Fed's outlook would change only if inflation rises further or the US economy slows down further. Further rise in prices, likely only if crude oil rallies back to record levels, would force the Fed to go in for more rate hikes. If the US economy shows signs of further slow down, pressure on the Fed to go in for a rate cut would increase.

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US Fed leaves rates unchanged; cautious on inflation