Editors Column

Central Bank Watch -The Fed

What next for the Fed? The FOMC meet again on April 30 and having already slashed the Fed Funds rate by 2% this year as the US economy fights against a recession, expectations are for the Fed to further cut rates at the end of the month by either 25 or 50 basis points. With the weak performance of the US economy in the first quarter when growth likely contracted and the housing sector showed no sign of bottoming, one could be forgiven for believing a 50 basis points cut was already in the bag. But the Fed also has an inflation problem, one which is largely of their own making, as aggressive rate cuts in recent months has downed the dollar and helped ignite a commodity investment frenzy, something which is leading to further hardship for US consumers through inflated energy and food prices. Headline inflation was running at a rate of over 4% in the first 3 months of the year and this at a time when the US economy was contracting. The current spike in oil prices can be attributed almost exclusively to an investment hedge against a weakened dollar, which has fallen rapidly this year. The Fed will not get into much of a strop about the value of the dollar but some FOMC members are voicing increased concerns about the inflation outlook and a proposal for a 50 basis point cut at the FOMC meeting this month could prove to be divisive. Indeed the Fed’s aggressive rate cut policy thus far has done little to ease the strife of borrowers, or ease the broader credit crunch for that matter. While acting in isolation from the ECB, a continuation of the Fed’s aggressive easing policy may only result in higher fuel and inflation costs for US consumers and dampen wider consumption, thus pushing the US economy into an even deeper slump. A dollar recovery would help pull down commodity prices and curb inflation but a genuine recovery is not on the cards until such time as the Fed indicates it is at the end of its easing cycle, or the ECB signal it intends to cut euro interest rates. With neither prospect going to happen over the next couple of Central Bank meetings, the most likely outcome from the Fed’s April meeting is a more orderly 25 basis point, which would see the Fed funds rate drop to 2%, or 200 basis points below the interest rate for the euro. Donal Keane, Apr 17.

Previous stories

Live News Feed -

Press Menu for Channel