US interest rates: Stop or stopgap?

Source: EM

After seventeen successive 25 basis points interest rate hikes in the past 26 months (since June 2004), the US Federal Reserve finally paused its campaign, much in line with anticipation from economists, analysts, thinkers, journalists and everyone else who would have something to do/not to do with the US monetary policy. However, in the same breath, it also indicated that further rate hikes might be on anvil, if ‘need’ be!

At the Federal Open Market Committee (FOMC) meeting yesterday, the Fed decided to keep the benchmark US Federal funds’ rate at 5.25%. In the statement released to justify its latest stance, the Fed has indicated, “Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.”

It further stated, “Readings on core inflation have been elevated in recent months, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.”

However, these statements were not without the usual warning that more rate hikes might come in the future, dependent on economic and monetary data flows. The Fed statement read, “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.”

Notably, this pause in the Fed’s stance on interest rates was much anticipated, as economic reports in the US had been indicating in recent times that a slowdown was posing a greater risk to the US economy than higher inflation. The US economy is already facing the brunt of higher crude prices and weakness in the housing sector. The Fed’s rate hiking campaign, which was aimed at slowing down consumption growth was further dampening sentiment in the world’s largest economy, one that acts as a locomotive for global economic growth.

The latest vibrations emanating from the Fed seem to have left economists and investors confused as to what might be the central bank’s stance in its next meeting. However, the anticipation and expectation game starts all over again, as a purview to the Fed’s next policy meeting scheduled for September 20 2006.

As Samuel Johnson quoted, “We love to expect, and when expectation is either disappointed or gratified, we want to be again expecting.”

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