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US Fed to decide on lending rates

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The US Federal Reserve was widely expected to keep its key lending rate at virtually zero percent Tuesday as financial markets look for signals of future monetary policy tightening.

Central bank chief Ben Bernanke chairs the one-day session of the Federal Open Market Committee, which analysts expect to be a heated affair with some members seeking to end the Fed’s pledge to keep rates low “for an extended period.”

The Fed had maintained the federal funds rate — at which banks charge each other for loans — at an unprecedented zero to 0.25 percent range since December 2008 to help the economy recover from its worst financial crisis in decades.

“There is no sign whatever that Mr. Bernanke or the Washington-based governors believe a shift in tone, let alone policy, is warranted at this point,” said Ian Shepherdson, chief US economist for High Frequency Economics.

Specifically, he said, the Fed was unlikely to change or drop the key language from recent policy statements: “Economic conditions… are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

At least three regional central bank chiefs would like to change the language of the traditional statement issued at the end of the meeting but only one — Kansas City Fed president Thomas Hoenig — is a voting member of the FOMC this year, noted Shepherdson.

The 12-member FOMC comprises seven members of the Fed’s board of governors and five of the 12 regional central bank chiefs. Two vacant board seats have not been filled.

Hoeing voiced rare dissent at the last FOMC meeting in January when it voted 9-1 to maintain the ultra low rates aimed at fueling investments and growth as unemployment hovered at near double-digits.

“The key takeaway will be the Fed’s statement on the outlook,” said Andrew Fitzpatrick, director of investments with Hinsdale Associates. “Markets are closely watching to see if the Fed signals it may be time to raise rates soon.”

Ahead of the FOMC meeting, the US dollar traded higher Monday against every major currency, underscoring the market’s anticipation that the central bank may signal that policy tightening is not too far away.

“We believe that the rally in the US dollar is a reflection of the market?s hope that the Fed will come through (Tuesday) by growing more hawkish and optimistic,” said Kathy Lien, director of currency reserach at Global Forex Trading.

A poll among economists suggests the Fed would hike rates within six months.

A majority of 203 economists of the National Association for Business Economics (NABE) surveyed believed that a rise in interest rates is “both likely and appropriate” within that period.

The central bank raised its discount rate for emergency bank loans by a quarter point last month but indicated that this was not a sign of tightening of overall policy.

US authorities pumped hundreds of billions of dollars into the world’s largest economy to jolt it from a deep recession since December 2007. The Fed will need to raise rates gradually to keep inflation in check.

The Fed policy makers also are likely to confirm at the meeting Tuesday that the central bank will complete purchases of 1.25 trillion dollars of mortgage-backed securities by the end of this month.

“However, we look for it to signal that it retains the option of purchasing more securities should the economic outlook deteriorate,” said Ajay Rajadhyaksha, an analyst with Barclays Capital.

The program has been widely credited with pumping up the housing market, which was at the epicenter of the financial crisis triggered by a mortgage meltdown.

Source: AP

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