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Language eyed as Fed set to raise rates

May 10, 2006

By Tim Ahmann

WASHINGTON (Reuters) – The Federal Reserve is set to raise
interest rates on Wednesday to the highest level in five years
and may use a post-meeting statement to open the door to a
pause after 16 straight, well-telegraphed hikes.

Meeting for only the second time under Chairman Ben
Bernanke, the central bank’s policy-setting Federal Open Market
Committee appears certain to raise the overnight federal funds
rate by a quarter-percentage point to 5 percent.

The meeting began at 8:30 a.m., a half-hour earlier than
usual, a Fed official said. The central bank cited no reason
for the early start.

The latest Fed salvo against inflation would take the
benchmark lending rate to its highest level since April 2001,
just after the U.S. economy slipped into recession.

The seeming certainty of the rate decision, which will be
announced around 2:15 p.m., stands in contrast to the questions
surrounding what the Fed might say about its future plans in
its post-meeting announcement.

Some economists think the widely anticipated rate increase
will be the last in a cycle dating to June 2004; others think
officials might take no action at their subsequent meeting in
June but that the economy’s momentum will force the Fed to push
credit costs higher later in the year to keep inflation tamped
down.

The heightened uncertainty is also in evidence at the
central bank, and policy-makers are expected to step back from
guidance they offered after the last rate hike in March that
“some further policy firming may be needed.”

“The trick will be to choose language that prevents the
market from finding guidance in the statement where none is
intended,” economist Lou Crandall of Wrightson ICAP said in a
note to clients. But Crandall added the Fed would “have to be
careful not to soften the language too much for fear of
appearing to signal that the tightening cycle is over.”

Economists at Goldman Sachs said carving out room for a
possible pause after foreshadowing rate hikes for the past two
years poses “an unprecedented challenge” for the Fed.

Bernanke told Congress two weeks ago the Fed could pause at
some point, even if inflation risks were not entirely balanced,
in order to assess incoming data and get a clearer sense of the
economy’s path.

He said, however, such a pause would not preclude further
rate moves and economists expect the Fed’s statement to
indicate a willingness to continue to push rates higher.

“We believe the rate hike on Wednesday will mark the last
of the current tightening cycle, but even if we are right and
the Fed does move to the sidelines, it deliberately will not
tell us the tightening cycle is over,” David Rosenberg, North
American economist at Merrill Lynch, wrote in a research note.

The difficulty of the Fed’s task is underscored by the
tension between the central bank’s forecast of slower growth
ahead with recent signs of bubbling inflation pressures.

The Fed’s favored gauge of core consumer prices rose a
stiff 0.3 percent in March, pushing the 12-month increase up to
2 percent — the top of Bernanke’s comfort zone. It appears
inflation expectations are drifting up as well.

However, in a potential sign of slowing economic growth,
the economy created only 138,000 jobs in April, far fewer than
analysts had expected.


Source: reuters



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