The Hindu Business Line : Fed may water down language

It coincided with the meeting of the Federal Open Market Committee (FOMC), which sets US interest rates. Even for the unflappable Greenspan, his last day in office must, indeed, have been an exciting one.

The easiest part is deciding on interest rates. A 25-basis points increase is passe.

But what after? And how should the FOMC word the traditional post-meeting statement? Must it talk of inflation risk or the possibility of a slowdown (which means rate hikes will end)?

Most important, should it pre-empt the incoming Chairman, Mr Ben Bernanke, in committing itself to either line of action?

The minutes of the last FOMC meeting showed that at least a few members thought that aggressive interest rate posturing is no longer necessary.

Last week's data on QIV GDP reported a sharp deceleration in growth to 1.1 per cent from 4 per cent + in QIII. Consumer spending fell, as did business investment.

The buoyant housing sector has also turned tepid. Nevertheless, bond yields rose from their lows, supporting the market's call for a still positive economy.

But, clearly, there are a lot of negatives in play and on the horizon. If housing does tumble, it is difficult to see a substitute domestic growth engine. Hope must then rest on a strong revival in Europe and Japan, in addition to the already booming China and India.

There is also the ever-present trade deficit, which is mounting by the day. That could cause a steep dollar correction and has ominous portents for bonds and stocks.

Undoubtedly, there is potential for a first-class global financial crisis.

The question facing the Fed is what purpose more rate increases will achieve. Inflation, by all accounts, is under control.

There is no asset bubble in the making. The pace of economic growth is modest. By no means could the US be said to be in a boom.

The prognosis must, therefore, be for the FOMC to somewhat water down its emphasis on the need for future rate increases. After all, it can quickly react to any emerging inflation risk.

Mr Greenspan's was an almost entirely data-driven policy.

Mr Bernanke is unlikely to depart from Mr Greenspan's legacy of a discretionary approach to setting interest rates in the immediate future, although he is on record advocating inflation-targeting.

Fed-watching continues to be an interesting sport!

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