The United States Federal Reserve has finally suspended a run of interest-rate hikes stretching back more than two years, explaining that slowing economic growth will vanquish the menace of inflation.
But the reprieve for investors, consumers and businesses around the world could be short-lived, many economists believe.
The central bank’s Federal Open Market Committee (FOMC) on Tuesday voted, with a lone dissenting voice, to keep the benchmark US cost of borrowing at 5,25%.
It was the first time since June 2004 that the bank has left the federal funds rate unchanged.
But it did leave itself room for manoeuvre, having brought the headline rate up from a 46-year low of 1% to squelch energy-induced inflation in the world’s largest economy.
The FOMC said economic growth has “moderated”, reflecting a cooler housing market and the effect of record-high energy prices.
While inflation readings have been “elevated” in recent months, the FOMC said, price pressures “seem likely to moderate over time” because of past rate hikes and other factors restraining demand.
“Nonetheless, the committee judges that some inflation risks remain,” the FOMC added, saying that the “extent and timing of any additional firming” would depend on both inflation and economic growth.
Wall Street share prices erased earlier gains to close lower on the Fed’s indication that it would remain vigilant against inflation, even as it holds rates steady for now. The dollar was steady on currency markets.
“One way or the other, I think it’s unfinished business,” commented Stephen Buser, professor of business finance at Ohio State University. “They indicate it is a pause, rather than the end.”
Astronomic energy prices are stoking price rises in the industrial and consumer pipelines. But Fed Chairperson Ben Bernanke has stressed that he believes cooling growth should curb inflation in the coming months.
Data out on Tuesday showed that US workers’ productivity slowed abruptly, to grow by just 1,1%, in the second quarter. But at the same time, unit labour costs staged the sharpest jump since the end of 2004.
The report was consistent with a raft of figures that have pointed to the US economy slowing down on the one hand but building up inflation on the other.
Some analysts said the Fed under its novice chairperson had left itself vulnerable to the shifting winds of economic news, rather than setting out a consistent policy for the markets to follow.
“If they have to start hiking again, it means they didn’t do enough beforehand. Once you raise the spectre of inflation, you’ve got to slay it,” said Joel Naroff, of Naroff Economic Advisors. “The question is, how much time do the markets give them? Their only let-out is if inflation suddenly slows, which it won’t, or if growth comes in really bad in the third quarter, which it could.”
US economic growth in the second quarter was a disappointing 2,5%, compared with a booming pace of 5,6% in the first three months of the year.
Buser at Ohio State said “rookie mistakes” by Bernanke, who succeeded veteran Fed chief Alan Greenspan in February, were to blame for the central bank sending out mixed messages to the markets.
But other pundits said the Fed’s warnings on inflation were only rhetoric for public consumption.
“Although the statement left the door open to more tightening, it implied that the hurdle for such a move is quite high,” Goldman Sachs economists said. “Accordingly, we expect the next rate move by the FOMC to be a rate cut, though probably not until the spring of 2007.” — AFP