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S. Balakrishnan

It is the inflation side of things which may not give Mr Greenspan that much comfort.

ANOTHER Fed meeting. Another day of suspense for the markets. Will they or won't they?

Again the issue is not whether the Fed will raise rates but if there will be any change in their stance of doing so at a "measured pace".

A 25 basis points increase is already factored in and will push up Fed funds to 2.75 per cent. There has not been a single meeting since June 2004 without a rate hike.

How much longer will this go on? When will the Fed be satisfied that its job is done?

These are the questions engaging the markets. Recent speeches of Mr Alan Greenspan's colleagues on the Federal Open Market Committee (FOMC), the interest rate-setting body of the US Federal Reserve, suggest there is no imminent possibility of sharper rate moves. It will all depend on the data, they say.

And the data show the economy chugging along at close to 4 per cent growth. Even non-farm payroll, which had tended to under-perform the economy, picked up quite well in February with the addition of 2.62 lakh jobs - a considerable improvement on the previous two months, which averaged only around 1.5 lakh.

It is the inflation side of things which may not give Mr Greenspan that much comfort.

Commodity prices - energy, metals and agris - have been on a roll. Much of the increase has been attributed to increased demand from China and India, which are on an accelerating growth path. Thus, despite the oil market being well-supplied by current production and inventories, the market perceives a fundamental demand - supply imbalance developing. This has driven up crude to close to $60.

The key question is, of course, if these will be reflected in consumer price inflation. The answer is still unclear. The core PCE index, i.e., excluding food and energy, which Mr Greenspan believes more accurately measures the behaviour of consumer prices, did rise 0.3 per cent last month - not good news for sticking to the policy of a "measured pace" of rate increases.

Nonetheless, one swallow does not make a summer. It is not as if the economy and the job market are red hot. Price increases in the backend of the supply chain are a matter of concern but it remains to be seen how much of pass through is going to be there.

Meanwhile, the Fed is unlikely to deviate from its 25 basis points actions.

However, the post-meeting statement could well see a change in phraseology to take account of the incipient upside risk on the inflation front.

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