End in sight for Fed rate hikes

The US Federal Reserve's cycle of interest rate increases will end soon, most Fed policymakers believe, and some are concerned about lifting rates too far, minutes of last month's policymaking meeting indicate.

    Ben Bernanke, the Fed chief, is expected to halt hikes soon

    Minutes from the March 27-28 meeting of the Federal Open Market Committee (FOMC) gave the clearest signal to date that the central bank was close to ending its policy of gradual rate hikes after 15 quarter-point increases.

    A summary of the minutes said: "Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy.

    "However, members also recognised that in current circumstances, checking upside risks to inflation was important to sustaining good economic performance."

    Big reaction

    At last month's meeting, the Fed raised its base rate by 25 basis points to 4.75%. Most analysts expect another increase  at the May FOMC meeting, but experts have been divided on policy actions after that.

     

    Economists generally believe that a rate move impacts the economy with as much as an 18-month delay or "lag".


    There was a big reaction to the minutes in financial markets. Stocks surged after the minutes were released as traders saw light at the end of the interest-rate tunnel. The dollar fell and bond prices rallied.


    During the discussion, Fed officials agreed that "the effects on spending of the substantial increase in short- and intermediate-term rates since June 2004 had probably not yet been fully felt".

     

    Inflation contained


    Janet Yellen, the president of the San Francisco Fed, said in a speech on Tuesday that she was one of the officials worried that the central bank might overshoot and choke off economic growth.


    In remarks released by the Fed, she said: "Although inflation is in the upper portion of my comfort zone, it appears to be well-contained at present, and my best guess for the future is that it will remain well-contained."


    The odds that the Federal Reserve will raise interest rates to 5.25% in June faded on Tuesday. In the federal funds futures market at the Chicago Board of Trade, investors were pricing in a 28% chance of a rate hike in June, down from 54% earlier.

    SOURCE: AFP


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