Fed to leave rates unchanged amid economic uncertainty

WASHINGTON - A powerful US central bank panel, led by Federal Reserve chairman Ben Bernanke, is widely expected to keep its key interest rate unchanged in the coming week amid growing economic uncertainty.

By (AFP)

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Published: Sun 3 Aug 2008, 3:41 PM

Last updated: Sun 5 Apr 2015, 11:48 AM

Most economists are betting that the Federal Open Market Committee (FOMC) will keep the federal funds rate firmly anchored at 2.0 percent amid lackluster economic growth.

Analysts say the Fed is caught between a rock and a hard place because a cut in rates could trigger fresh inflationary pressures while a rate hike could strangle fragile economic momentum.

Thus, Bernanke and his fellow central bankers are expected to sit on their hands during a policy meeting set for Tuesday.

"I think the Fed is going to stand on the sidelines holding at 2.0 percent. We're getting a very mixed economic picture right now," said Scott Anderson, an economist at Wells Fargo.

Anderson said the world's biggest economy is throwing off mixed signals which makes it likely that the Fed will not want to make any rash rate calls.

Official data revealed that the economy grew at a 1.9-percent pace in the second quarter which marked an improvement from the first three months of the year, but the economy got a timely boost from a giant 168-billion-dollar emergency stimulus.

America's unemployment rate meanwhile ticked up to 5.7 percent during July, according to another government survey. Economists say job losses this year are not as bad as in prior recessions, but the unemployment rate is now at a four-year peak.

Some analysts believe the 14-trillion-dollar US economy has already slumped into a recession -- the government revised its tally for 2007 fourth-quarter growth last week to a negative 0.2 percent -- but others say the economic picture is not so dire and that a recession will be avoided.

If market predictions come true, the Fed will keep rates on hold for a second straight time on Tuesday after slashing rates aggressively by 3.25 percentage points between September and late April.

The Fed cut rates in a bid to fire up economic vitality which has been threatened by a lingering housing market downturn, a credit squeeze in the banking industry and searing oil prices.

"I think the housing market is really the central element of this crisis," Bernanke told Congress last month, signalling that a potential rebound in the housing market could trigger an economic revival.

The Fed is unlikely to raise rates until the housing market stabilizes, especially as stretched consumers appear to be cutting back on purchasing big-ticket items like cars and large household appliances.

"The Fed will do nothing next week. Fed will keep fed funds at 2.0 percent, voice its concern about the longer term inflation threats from commodity prices," said John Lonski, the chief economist at Moody's Investor Service.

Some analysts say the Fed would like to raise rates, in part to ward off the inflationary risks presented by high oil prices, but they say the ailing housing market has boxed policymakers into a corner.

"In the minutes of its June meeting, the FOMC characterized the economic outlook as "very uncertain' and the appropriate path for interest rates as "quite unclear.' Arguably, this foggy policy environment has only worsened in the intervening six weeks," analysts at Lehman Brothers said in a research note.

The central bank is expected to lift rates later this year after November's presidential election, or by early 2009 on the premise that the housing market will recover, inflationary pressures will cool and wider growth will start to improve.

But as veteran economists will tell you, no one can read the future, and events might dictate otherwise.

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