Friday, September 22, 2006
[RealEdge] BT : Fed looks set to put rates on hold till year's end
| Published September 22, 2006  | ||||||||
| US INTEREST RATES | ||||||||
| Fed looks set to put rates on hold till year's end Issue is whether it will accept consistently above-target core inflation rates
By ANDREW MARKS
AFTER two years of regular increases of 25 basis points in short-term interest rates by the US central bank's interest rate committee, Wall Street may have itself a far more welcome expectation for the next few months: the Federal Reserve leaving rates unchanged.
'The Fed is indicating that while it's not entirely comfortable with the steady 0.2 per cent increases in core inflation we've been getting from the consumer price index data, only a long stretch of 0.3 per cent increases would cause the markets or the Fed to change positions. So right now, the best guess is that the FOMC (Federal Open Market Committee) is on a hold that could last at least until the Dec 12 meeting,' said Joel Naroff, president of Naroff Economic Advisors. As was widely expected, Fed policy-makers on Wednesday left their target Fed Funds rate steady at 5.25 per cent for the second meeting in a row. In its accompanying statement, the committee said the cooling housing market was moderating US economic growth. Prior to the August meeting, 17 consecutive meetings of the FOMC had each raised rates by 25 basis points. 'The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market,' the statement said. 'Inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand,' the Fed added. 'Some inflation risks remain.' Richmond Fed president Jeffrey Lacker dissented again, voting to raise rates by another 25 basis points, saying inflation remained too high. Stock market investors clearly approved of the Fed's commentary, sending the major indices up. The S&P 500 closed just below a five-year high, up 0.52 per cent at 1,325.18. The Dow Jones Industrial Average finished up 0.63 per cent at 11,613.19, just 0.93 per cent off its all-time high of 11,722.98 reached on Jan 14, 2000. In early trading yesterday, stocks appeared set to continue their steady climb. 'There was something in the statement for everybody,' observed Joe Battipaglia, chief market strategist at Ryan, Beck. 'The Fed was saying that its view of the economy and inflation remains unchanged and it doesn't see the need to raise rates, which is a bullish signal for stocks. But the fact that they retained some hawkish language on the inflation front and that one of the Fed board members voted for a rate hike also satisfies the market's need to feel that the Fed remains vigilant on inflation,' he said. Energy prices have declined sharply since the last FOMC meeting. Oil in particular has fallen about 20 per cent. The question Wall Street economists are now asking is whether FOMC members will accept consistently above target core inflation rates. 'There is a simple message from the Fed right now, which is 'we're uncertain about where things are headed here and we want to buy some time',' said Ethan Harris, chief economist at Lehman Brothers. David Rosenberg, chief US economist at Merrill Lynch, said the next FOMC meeting, on Oct 24, will be the 'really decisive meeting' because if rates remain on hold, there is a good chance the Fed will not raise them again. 'History tells us that after a tightening cycle, if the Fed then goes on hold for at least four months, then the probability that the next move is a rate cut is 100 per cent,' Mr Rosenberg said. For now, Wall Street is betting that the Fed will accept core consumer inflation above its 'comfort zone', so long as it remains within the current range. Mr Battipaglia and other market strategists believe that the Fed moving, however cautiously, to the sidelines means that investors can shift their attention to other market fundamentals, particularly the upcoming third-quarter corporate profit-reporting season, and falling oil prices. That certainly favours a continuation of the market rally. Although third-quarter earnings announcements will not come for another three weeks, the early indications are strong. On Wednesday, Tech giant Oracle, Morgan Stanley and electronics retailer Circuit City all reported earnings that beat analyst expectations. 'That's good news from three important sectors of the economy - technology, financials, and retail,' noted equities trader Ray Bittman. 'You especially like the Circuit City results because it tells you the consumer is still out there buying despite the housing slowdown.' | ||||||||
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