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FED TO LEAVE RATES LOW THIS MONTH

DAVID MORRISON
CFD MARKET STRATEGIST, GFT
IT IS a relatively quiet week on the data front but the closely-watched preliminary US first-quarter GDP will be published on Friday. The forecast is for a rise of 3.4 per cent – a sharp moderation from last quarter’s 5.6 per cent.

Meanwhile, today sees President Obama host the first meeting of the National Commission on Fiscal Responsibility and Reform. US national debt is currently around 87 per cent of GDP and rising, so there will be plenty to talk about.

On Wednesday the US Federal Reserve concludes a two-day meeting. Although analysts aren’t anticipating any drama, we’re seeing a greater divergence in views over the timing of a rate rise. But there first has to be a modification in the language and the consensus view is that the Federal Open Market Committee (FOMC) will maintain its current stance – interest rates are likely to remain “exceptionally low” for an “extended period”. The market’s understanding is that each time this is used, it is implicit that the Fed funds will remain unchanged for a further six months.

The FOMC has noted an improvement in the economy but it remains concerned about high unemployment, which has convinced analysts that the current rate will be maintained. However, if other economic data is indicating that recovery has taken hold, then some argue that the Fed should already be raising rates. The president of the Kansas City Federal Reserve, Thomas Hoenig, has now twice dissented over the FOMC statement. He has publicly voiced his concerns about inflationary pressures.

In the meantime, stocks continue to forge ahead with US indices hitting fresh 19-month highs last week. Some investors are increasingly concerned that the low Fed rate is all that is holding up the market. The search for yield goes on, risk aversion is a side issue and another bubble is being created. At some stage, the Fed will have to move rates higher. The trick is to make sure this is done without spooking the markets.