Source Pravda.Ru

US Federal Reserve to change interest rates only in mid 2007

The Federal Reserve, under first-year Chairman Ben Bernanke, appears close to achieving the tricky maneuver of steering the U.S. economy to a slowdown that will keep inflation under control.

That is the growing view of economists who believe Bernanke and his colleagues are nearing the goal of slowing economic growth as a way of lowering inflation pressures while making sure the slowdown does not become something more severe such as a recession.

It is widely expected that the Fed will hold a key interest rate unchanged at its last meeting of the year Tuesday. Many economists believe it could be the middle of 2007 before the Fed moves rates again if the economy performs as expected.

Call it beginner's luck, but I think Bernanke, in his first year as chairman, will achieve the soft landing he wants," said David Jones, chief economist for DMJ Advisors, a consulting firm in Colorado.

Last February Bernanke succeeded Alan Greenspan, who retired after 18Ѕ years as Fed chairman. During that period, Greenspan steered the economy into soft landings including a decade-long economic expansion from 1991 until early 2001, the longest in U.S. history.

Greenspan also presided over Fed credit tightening that contributed to recessions in 1990 and 2001, showing how tough it is to guide a $13 trillion (EUR 9.9 trillion) economy.

Worried that inflation could get out of hand, the Fed raised a key interest rate 17 consecutive times from mid-2004 through June of this year, pushing the federal funds rate to 5.25 percent, up from a 46-year low of 1 percent.

Since August, however, the Fed has held meetings in August, September and October in which it left rates unchanged as it monitored the impact the long string of rate increases was having.

Should the Fed leave rates unchanged Tuesday, as expected, it would be a break for millions of consumer and business borrowers, because banks' prime lending rates would remain frozen at 8.25 percent, the highest level for this key benchmark since early 2001.

Growth has slowed dramatically this year, going from a sizzling annual rate of 5.6 percent from January through March to just 2.2 percent in the summer as consumers have slowed their spending in the face of soaring energy prices, higher interest rates and a crumbling housing market.

There had been worries that growth was slowing so much that the Fed might have been forced to reverse course and start reducing interest rates. But Bernanke and other Fed officials have signaled that the central bank is still too worried about inflation to start cutting rates.

Many economists believe the Fed's first rate cut will occur around June of 2007 and they believe there could be two quarter-point reductions next year.

By June, analysts believe the Fed's preferred measure of inflation, which excludes volatile energy and food prices, will have dropped from an increase on a yearly basis of 2.4 percent currently closer to the Fed's comfort zone of gains of 1 percent to 2 percent.

The rate cuts will be needed because unemployment, which ticked up slightly to 4.5 percent last month, will have risen closer to 5 percent by the middle of next year, economists are forecasting, the AP says.

With the economy growing at rates hovering around 2 percent, there is the potential that an unexpected shock could wreck hopes for a benign slowdown.

"There is always the risk that the economy could get sideswiped by something unforeseen," said David Wyss, chief economist at Standard & Poor's in New York.

One of the biggest threats is seen in the once-booming housing market, which has slowed considerably this year with sales and prices declining, which could depress consumer spending should it worsen further.

Economists mention, however, that jobs are still being created at a solid pace as a factor that should keep spending from falling too much.

"I think the Fed is going to get what it wants, which is an economy with a little more slack and a little less inflation," said Mark Zandi, chief economist at Moody's Economy.com.