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Fed to stay with measured US rate hike tactics
11/1/2005
WASHINGTON, Oct 31 (Reuters): The US Federal Reserve is expected to hike interest rates by a quarter percentage point to 4.0 per cent when it holds its policy-setting meeting Tuesday, and give no signal the campaign to tighten monetary policy is nearing an end.
The Federal Open Market Committee (FOMC) will issue its interest rates decision after 1415 EST/1915 GMT at the end of the meeting, which will be the third from final gathering chaired by Alan Greenspan, who retires on January 31.
President George W Bush Monday named Ben Bernanke as the next Fed chairman, subject to confirmation by Congress. Economists see the transition as another good reason to expect the US central bank to remain on the inflation offensive.
"We expect the 12th consecutive increase in the target fed funds rate and really no change in the tactics deployed in recent meetings," said Lynn Reaser, chief economist at Bank of America Capital Management in Boston.
The Fed's statement accompanying the interest decision has stuck with a commitment to removing policy accommodation at a measured pace.
Policy-makers have also said a considerable amount of accommodation has already been removed, indicating the Fed is at least thinking about halting the rate hike cycle at some point.
But the Fed has also done nothing to remove the market's impression that it still thinks rates are too low, or at least below neutral-a theoretical description of a setting for policy that neither stimulates nor hinders economic activity.
Fed policy-makers are purposely vague about what level they consider neutral, and say that it can alter over time.
A change in the wording of the statement would be a clear hint of how much higher they see interest rates going, but that change is not expected Tuesday.
Fed policy-makers have also said they are committed to keeping inflation at bay amid soaring energy costs. Data Friday showed underlying prices, which strip out energy and food costs, remain tame while the economy is pretty strong.
US gross domestic product growth increased to a 3.8 per cent annual rate in the third quarter from 3.3 per cent in the previous three months, data Friday showed. But year-on-year core PCE, a measure of the inflation faced by shoppers, rose just 1.3 per cent.
That said, the Fed wants to stay ahead of potential risks to inflation so with growth solid, it will stick to its plan of increasing rates gradually.
It will also be aware of investor concern ahead of the Bernanke succession, which Fed watchers think will make the US central bank even more determined to defend its anti-inflation credentials.
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