Fed signals shift in rates policy

The Federal Reserve yesterday paved the way for a hike in US interest rates later in 2002, shifting from a slightly pessimistic to a neutral bias, saying that the upside and downside risks for the US economy were balanced.

The central bank's policymaking Federal Open Market Committee did not adjust rates at its session yesterday, leaving the key overnight fed funds rate at 1.75 per cent, the lowest since the Eisenhower era.

But it left little doubt that after 11 straight reductions, the next move in rates will be upward.

The Fed, in contrast to its last pronouncement on 30 January that the balance of risk was still towards weakness, the Fed this time was more upbeat. "The economy, bolstered by a marked swing in inventory investment, is expanding at a significant pace," the central bank said.

Nonetheless, risks remained. "The degree of strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain," the Fed added. According to analysts, a rate increase is unlikely at the FOMC's next scheduled meeting in May, but could come the following month.

The Fed's stance had long been predicted by Wall Street, where the Dow moved down after the news. The key shift in Fed policy came as a leaked report showed the International Monetary Fund was optimistic about global growth next year.

The IMF's latest economic outlook, published next month, will raise its forecast for growth this year to 2.5 per cent from the 2.4 per cent it pencilled in in December, according to a German newspaper.

The IMF has forecast US growth of 3.8 per cent next year – three times the 1.4 per cent it expects in 2002. On the UK, the IMF forecast growth of 2.8 per cent next year, at the lower end of the Chancellor's predictions.