Federal Reserve

Fed expected to hold rates as growth surges

PUBLISHED : Monday, 01 February, 1999, 12:00am
UPDATED : Monday, 01 February, 1999, 12:00am

The Federal Reserve Board's first policy meeting of the year begins tomorrow, but despite fraught conditions in financial markets and escalating concern that these might spill over into the United States economy, very few analysts are expecting monetary policy to change.

After the quick-fire reductions in interest rates last year over three consecutive meetings, the Federal Open Market Committee (FOMC) chose at its last gathering on December 22 to leave the Fed funds rate at the 4.75 per cent level.

At their two-day meeting, Fed governors will be more than aware of the stiff economic challenges Brazil faces, which as the world's eighth largest economy is more than capable of destabilising global financial markets.

Similarly, it will not be lost on committee members that the year was barely two weeks old before the Bank of Japan appeared forced to spend US$4 billion to stop a damaging appreciation of the yen.

Fed chairman Alan Greenspan will be quick to remind his fellow committee members that while the FOMC has to be aware of global events, its prime concern when setting interest rates must be with the prevailing conditions in the US economy.

Unless there is a direct corollary between the outlook for the economy and international economic and financial events, monetary policy is largely determined purely on the basis of domestic factors.

The latest gross domestic product figures released on Friday have confirmed that despite the economic downturn being experienced in most of the world's leading economies, the US economy is still growing strongly.

On Friday, fourth-quarter gross domestic product soared higher than even the most optimistic of forecasts, jumping 5.6 per cent, giving the US a growth rate of 3.9 per cent last year.

Even Brazil's crisis is being shrugged off in the US.

'The problems in Brazil do not seem to have been feeding through into the financial system,' said Richard Jeffrey, the chief economist at Charterhouse Tilney.

'There don't seem to be any default problems.' The consensus is that US interest rates are likely to stay on hold for the foreseeable future.

Even if the economy begins to slow, the Fed will still be reluctant to cut rates as it will be keen to engineer a soft economic landing rather than fuel an unsustainable boom by easing monetary policy.