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Fed to keep interest rates on hold again

A GROWING economy, a rising stock market, and rising employment suggests that normality is returning to the United States. Indeed, the chairman of the Federal Reserve, Ben Bernanke, appeared notably upbeat about the economy earlier this month.

The US economy is forecast to grow at an annualised 3.5 per cent in the first quarter – figures will be released on Friday. While this is slower than in the exceptionally-strong fourth quarter, it is far from stagnation or a slip back into recession. But while Bernanke significantly did not repeat the Fed’s pledge to maintain short-term interest rates at exceptionally low levels for an “extended period” and tensions are growing among the board's members, it appears that the Fed is still wedded to ultra-loose monetary policy and there is little sign that this will change this week when the Federal Open Market Committee (FOMC) meets.

It has kept its foot firmly on the monetary pedal for more than a year by keeping interest rates at near zero and by buying up $1.7 trillion worth of long-term bonds. Letting its commitment to ultra-low rates lapse would be tantamout to a tightening of monetary policy and it seems that only Thomas Hoenig, president of the Kansas Federal Reserve, is an open dissenter.

Barclays Capital analysts Dean Maki and Michelle Meyer estimate the Fed will reiterate its “extended period” language but note recent Fed commentary suggests the extended period does not refer to a fixed amount of calendar time but is instead meant to refer to the evolution of economic data.

However, they believe that the extreme monetary policy accommodation is having its effects on the market and economic data and this trend should continue. “We expect the Fed to start hiking rates in September, bringing the fed funds rate to one per cent by the end of this year and then remaining on hold until the middle of next year.”