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Washington: FR expects to hold interest rates

By Staff
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Google Oneindia News

Washington, Mar 21: Caught between stubbornly elevated U.S. inflation and signs of weaker economic growth, the Federal Reserve is expected to hold interest rates steady as it wraps up a two-day policy-setting meeting on Wednesday.

While a decision to keep benchmark overnight borrowing costs at 5.25 percent is widely expected, financial markets are eagerly awaiting word on how the U.S. central bank views the economic outlook.

Most economists expect the Fed to reiterate concerns over inflation when it announces its decision around 2:15 p.m. (1815 GMT).

But analysts also expect the U.S. central bank to make a nod to a murkier outlook for economic growth clouded by turmoil in housing and stock markets and reports showing the economy expanding more slowly than first thought.

''We expect Fed officials to sound more open to the possibility of easing, if necessary,'' UBS economist James Sullivan said in a note to clients.

The landscape has changed for the Fed since its last meeting in late January, when the central bank saw ''firmer economic growth'' and ''signs of stabilization'' in downtrodden housing markets.

Since then, the government has revised down its estimate of growth in the fourth quarter to a 2.2 percent annual rate from 3.5 percent, while another report showed home sales fell 16.6 percent in January, the biggest decline since January 1994.

A 7.8 percent drop in January durable goods orders and a reference to the possibility of recession by former Fed Chairman Alan Greenspan were among factors sparking a sell-off in U.S. equities in late February. The blue-chip Dow Jones industrial average is down more than 500 points, or about 4 percent, since Feb. 20.

Meanwhile, adjustable mortgage interest rates resetting at higher levels at a time of stagnant or declining home values have contributed to a sharp rise in default rates among subprime mortgages, the loans made to less credit-worthy borrowers. Some 20 subprime lenders have gone out of business as a result.

Economists polled by sources March 9-14 said that as a result of worries about growth and fears the subprime conflagration could singe broader mortgage markets, the Fed would be likely to cut interest rates in the third quarter of the year.

Fed officials have said the equity market declines have not altered their view that interest rates at current levels are the best way to contain inflation.

''My view is that, taking all the new data into account, that there is really no material change in our expectations for the U.S. economy since I last reported to Congress a couple weeks ago,'' Fed Chairman Ben Bernanke told a congressional panel on Feb. 28.

In January, the central bank said that while readings on core inflation had improved, they were still concerned that tight labor markets could sustain inflation pressures. Fed officials have indicated since then that they remain ready to act to push back inflation if necessary.

''At this stage, the predominant risks center on whether inflation will continue to move down gradually,'' San Francisco Fed President Janet Yellen said on Feb. 23.

Analysts expect policy-makers' focus on inflation to remain in place.

''The growth data have not weakened by enough to allow, or to force, the Fed to stop worrying about inflation and start cutting rates,'' High Frequency Economics Chief U.S. Economist Ian Shepherdson said in a report to clients.

Reuters

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