Financial Daily from THE HINDU group of publications
Wednesday, Mar 29, 2006
Financial Daily from THE HINDU group of publications Wednesday, Mar 29, 2006 |
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Money & Banking
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Interest Rates Columns - Financial Scan Fed nears rate peak S. Balakrishnan
It is more likely than ever that Mr Bernanke will face a market collapse and crisis sooner or later.
The mystery of Mr Ben Bernanke is being unravelled. When this appears in print, he would have chaired his first Federal Open Market Committee (FOMC) meeting, which is charged with the US monetary policy and interest rates. It is undoubtedly a landmark event. For, his predecessor, Mr Alan Greenspan, became a legend in his own lifetime, presiding over FOMC for no less than 18 years. His chairmanship coincided with the globalisation and phenomenal growth of financial markets. The responsibilities and complexities of the central bank have, as a result, multiplied several fold. Making things devilishly complicated are the almost entirely unregulated segments of markets, such as foreign exchange and derivatives. Stocks currencies, bonds, commodity futures and options clearly have the potential to destabilise national and global economies. It is more likely than ever that Mr Bernanke will face a market collapse and crisis sooner or later. Meanwhile, what of the matter on hand, i.e., the (minor!) problem of the US interest rates at the current meeting of the Fed? Market watchers may differ on the economy, stocks and the dollar, but they all agree that FOMC will raise interest rates by 25 bps now. But what stamp will Mr Bernanke put in the post-meeting statement, which, in Mr Greenspan's time, used phrases such as "considerable period" and "measured pace" to convey the intent, direction and speed of interest rate changes? Will he be as communicative and transparent? The difficulty is that the economy is emitting mixed signals. Jobs are being created at a respectable rate but housing — the lead sector in recent times — has recorded mostly negative data of late. Leading indicators are down. Is growth about to decelerate or is it already decelerating? Should one continue with the serial rate rises or is it time to pause and take stock? The effect of 15 rate increases without break would normally be more than enough to cool the fiercest economy. The data do suggest that while growth has held up thus far, we could be at an inflexion point. And it is difficult to justify further increases on grounds of inflation risk, which, in the Fed's own words, is "well-contained." Five per cent or thereabouts looks a pretty neutral rate in current economic, business and price conditions. In which case, we should be almost at the end of the Fed tightening cycle for the present. But Mr Bernanke is unlikely to commit unequivocally to this course. No central banker ever won his spurs declaring the war on inflation has been won. The post-statement bark at this meeting and the coming ones is likely to be more than the interest rate bites.
Related Stories: More Stories on : Interest Rates | Financial Policy | Financial Scan
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