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Fed to announce stable interest rates

Latest update : 2008-06-25

Federal Reserve chairman Ben Bernanke is expected to announce Wednesday there will be no new interest rate decreases. The Fed has made a series of drastic interest rates cuts since September in order to contain the subprime crisis.

The Federal Reserve concludes a two-day meeting on interest rates Wednesday seeking a formula to ease growing anxiety over inflation even as the US economy struggles with near-recession conditions.
  
The Federal Open Market Committee headed by Fed chairman Ben Bernanke was widely expected to hold its base lending rate at 2.0 percent after a series of aggressive cuts since last September.
  
An announcement was due around 1815 GMT Wednesday.
  
Based on signals from Bernanke and others, analysts are anticipating a new statement from the panel highlighting the risks of inflation heating up.
  
Many analysts say the US economy is still too fragile to be able to absorb higher interest rates amid a horrific housing slump, high oil prices and tight credit conditions.
  
Just this week, data showed US consumer confidence hitting fresh lows and home prices tumbling.
  
"Here are the seven words you can't say these days without sending American consumers into a tizzy: subprime, housing, credit, employment, gasoline, food, and inflation. The Fed would do well not to add three more: higher interest rates," said Sal Guatieri, economist at BMO Capital Markets.
  
However, some expect the Fed will lay the groundwork for higher rates as early as August or September.
  
"Any actual change in rates seems very unlikely," said economist Ted Wieseman at Morgan Stanley.
  
"But the statement released Wednesday will be closely scrutinized to see to what extent it validates the market's expectations for a series of rate hikes starting no later than the September FOMC meeting."
  
Analysts say Bernanke and others may be talking hawkish about inflation in the hope that this will keep a lid on public expectations on higher prices that could become self-fulfilling.
  
"Policymakers are to issue a statement that shows more concern about inflation and less concern about economic weakness," said economist Gary Thayer at Wachovia Economics Group.
  
"Fed chairman Bernanke has already indicated that policymakers will resist any increase in inflation expectations. This policy may be intended to support the dollar and dampen demand for commodities."
  
Robert Brusca at FAO Economics added: "The economy is very weak and the Fed may yet be forced to cut rates before it raises them."
  
Brusca said the government's massive stimulus plan and tax rebates "may not have provided as much support as (Bernanke) thought."
  
The central bank has slashed rates since last September by 3.25 percentage points in an effort to reignite growth, but officials are signaling that cycle of cuts is probably over, and that inflation is now the biggest threat.
  
Analysts are divided on whether the Fed is simply "jawboning" or intends to follow through with rate hikes -- a particularly perilous course with a presidential election underway.
  
Moreover, the FOMC has been split in the past several meetings and analysts will be watching to see if the vote is unanimous.
  
"A dissent in the face of leaving rates on hold would be a more hawkish development as it would suggest that they wanted to hike rates now," said Marc Chandler at Brown Brothers Harriman.
  

Date created : 2008-06-25

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