Federal Reserve keeps rates on hold

10-05-2007

Federal Reserve keeps rates on hold
The US' central bank voted unanimously to keep its key interest rate on hold at 5.25 per cent yesterday.

Federal Reserve policymakers acknowledged that economic growth in the US had slowed in the first part of the year and that an "adjustment" in the housing market was ongoing.

But explaining its decision, the bank's federal open market committee stressed that the US economy was still likely to expand at a "moderate" pace over coming quarters.

The Fed has kept its benchmark overnight lending rate the same since June 2006, before which it had undergone 17 consecutive quarter-point rises.

Analysts claim that recent comments by the bank indicate that policymakers may be prepared to consider a cut in rates later this year, with a statement following March's rate decision suggesting that inflation fears had subsided.

Nonetheless in a note accompanying its latest decision the Fed warned that while inflationary pressures were likely to "moderate over time", inflation still remained "somewhat elevated".

Fed chairman Ben Bernanke and his colleagues indicated that the "high level of resource utilisation", a reference to high levels of employment, also had the "potential" to sustain such pressures.

"In these circumstances, the committee's predominant policy concern remains the risk that inflation will fail to moderate as expected," the federal open market committee said, indicating that future adjustments would depend on both the outlook for inflation and economic growth.

Kevin Logan, an economist at Dresdner Kleinwort Wasserstein in New York, said the statement indicated that rates would not be altered in the immediate future.

"They are not trying to send any signal of a policy change any time in the near term – the signal is no policy change, and there will probably be no change at the next meeting in June," he said.

Yesterday's decision by the Fed comes as the Bank of England is widely expected to raise the benchmark rate of borrowing in the UK by a quarter of a percentage point to 5.5 per cent.



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