US Fed Will Likely Keep Its Federal Funds Rate Unchanged But Continue To Exit Its Emergency Programmes
Long before the US Federal Reserve raises its Fed funds rate amid an improving economy, it will need to signal to the public that a change is in the works. For the past year, the Fed has signalled plans to keep interest rates near zero for “an extended period”, which implies that rates will stay near zero for at least several more months. For the next FOMC meeting on 16 March, the Fed is unlikely to change the wording, as many officials believe a recovery is not entrenched and inflation is still low. Also, the latest Beige Book findings suggest that the economy only improved modestly in January-February, while housing market has softened recently. Similarly, the unemployment was still high at 9.7% of total labour force in February, though it was off a peak of 10.0% recorded in November-December. Indeed, future markets anticipate the Fed will raise its key policy rate to 0.5% only by November or December. The termination of the Fed’s quantitative easing, which is scheduled to end by end-March, however, looks more certain and the normalisation of discount rate would likely continue. Although some investors worried mortgage rates could rise without the Fed’s support, the market’s reaction thus far has been a pleasant surprise.
Tracking The World Economy... - 11/03/2010
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