After a surprising show of strength in the US economy, the Federal Reserve is likely to keep interest rates steady at its upcoming monetary policy meeting to see if the trend continues, analysts say.
The Associated Press reported that the Federal Open Market Committee (FOMC), which meets Wednesday (Jan. 31), is widely expected to keep its base rate at 5.25%, where it has been since August, when the panel halted a series of 17 consecutive quarter-point increases to stem inflation.
In addition, the central bank is likely to maintain its warning or “bias” toward another rate increase, which analysts say is aimed at keeping inflation expectations in check.
While most Fed-watchers see no change in the funds rate Wednesday, more significant will be the statement on the panel’s assessment of economic conditions, which will provide clues on the Fed’s next move.
Stronger-than-expected data has eased concerns that the economy might slip into recession. At the same time it has diminished prospects for a rate cut that might be needed to stimulate activity, say economists.
“The problem for the Fed is that the FOMC meets (this) week and they have these strong housing data and even better general economic numbers to contend with,” said Joel Naroff of Naroff Economic Advisors. “The slowdown they had been pointing to is no longer there.”
John Lonski, chief economist at Moody’s Investors Service said the Fed is starting to come to grips with a stronger economy.
“If anything, the likelihood of a change in Fed policy is now shifting from a rate cut to a rate increase,” Lonski said.
Even though the labor market is tightening and boosting wage inflation pressures, Lonski said that “the idea of a rate hike cannot be taken seriously until the uncertainties surrounding housing have been sufficiently resolved.”
In the past few weeks, even the most bearish analysts have been upgrading their forecasts from a gloomy outlook to one that shows steady and moderate growth for the fourth quarter of 2006 and early 2007.