Fed can afford to sit tight

WASHINGTON: With the latest batch of economic data showing a light wind beginning to fill the US economy’s sails, Federal Reserve policy-makers have the luxury of sitting tight at their meeting today, analysts say. 

But what they say in their post-meeting statement will be crucial for financial markets, given the fallout from a smaller-than-hoped short-term interest rate cut in June and a shift in rhetoric in the top ranks. 

Long-term interest rates, set by financial markets, have surged since then as debt traders have stopped worrying about a downward spiral in prices and refocused on the prospects of an economic rebound. 

Wall Street economists widely expect the Fed to leave the federal funds rate, used for pricing overnight loans between banks, at 1%. 

“It’s a sort of ‘don’t rock the boat’ type meeting,” said Robert Dederick, economic consultant at The Northern Trust Co in Chicago. 

Recent reports have shown a US economy still struggling to gain steam, but with signs of improvement in some of its most troubled sectors. 

The overall economy grew at a stronger-than-expected 2.4% annual rate in the second quarter, according to the Commerce Department. That report also showed a welcome up-tick in business spending on plants and equipment. 

Gary Bigg, an economist at Banc of America Securities in New York, said recent data had been “fairly good,” adding: “In our second half of the year, production should do a lot better.” 

Manufacturing also looks to be on the road to recovery. 

But clouds remain on the economic horizon. Unemployment stood at a high 6.2% in July, showing companies are still squeezing more production from existing workers rather than hiring new ones. 

And the rise in long-term interest rates may start crimping the housing market, which has been a bulwark for the economy. 

Another job for the Federal Open Market Committee will be settling Wall Street nerves jangled by its shift on the deflation issue and a newfangled style of framing its assessment of economic risks that includes both growth prospects and inflation or deflation pressures. 

Some Wall Streeters have blamed at least a portion of the sharp bond market sell-off of recent weeks on dashed expectations built on the Fed’s deflation rhetoric. 

The tone of senior officials earlier this year had pushed bond rates lower because it led many traders to expect the Fed to step away from traditional measures to stimulate growth, perhaps using tools like the purchase of bonds to hold longer-term rates down. 

Fed chairman Alan Greenspan and other officials have since hastened to say there is little risk of a shift away from the main tool of economic stimulus – the federal funds rate. – Reuters  

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