View from City Road: Fed must act soon to quell turmoil

Click to follow
The Independent Online
Phew] That much-heralded hike in the US discount rate failed to materialise yet again yesterday. Once more the Fed has wrongfooted the markets by maintaining a steady monetary policy in the face of near-universal speculation that it would raise short-term rates.

Like the Bundesbank, the Fed hates to be pushed around by the markets. Every now and again - famously on occasions like the first rise in rates on 4 February - the US central bank likes to catch the market completely unawares.

No doubt it would take great pleasure in doing so again this time round but it may have some difficulty. Not yesterday, maybe not today, maybe not tomorrow but some time soon the Fed looks destined to raise rates once more. From now until the time of the Fed's policymaking Federal Open Market Committee meets on 17 May, the markets will be in a constant state of anticipation.

If the Fed fails to act, there will be little joy at the auction of dollars 29bn of US Treasury bonds planned for today and tomorrow. The Fed may be hoping that market reaction to US inflation figures due out on Thursday and Friday will be good enough to avoid a rise. But it is hard to see what difference this data would make to the general picture. However good the figures may be, they amount only to a report on the past. Last Friday's employment report signalled unambiguously that the economy is expanding strongly enough to put firm upward pressure on inflation. Long bond yields have already risen a quarter point since Friday's jobs report and that should tell the Fed something. At the very least, the markets are looking for a 25-basis-point rise in short rates; 50 basis points to lay inflation fears to rest.

Failure to act soon only increases the risk of renewed market turmoil, not just in the US. Maybe one day European markets will decouple from those of the US, but so far there's little sign of it.

In some quarters, worry about US inflation is now so well advanced that some forecasters are looking for the Fed Funds rate to end the year at 5.5- 6 per cent, instead of the 4-5 per cent once commonly predicted.

Comments