FOMC to keep rates unchanged

The FOMC has kept the rates unchanged at 5.25%.

David Cohen, Director at Action Economics says that a rate cut is unlikely any time soon and as far as what Fed emphasized, that it will depend upon how the data turns out. He adds that everyone is focused on the possible problems in the housing market spilling over to other sectors but the labour market data remains solid.

Excerpts from CNBC-TV18's exclusive interview with David Cohen:

Q: How much has your stance changed over the couple of days after what you have heard from the Fed and the language that they have used to describe inflation, among other things?

A: They did seem to edge away from their previous stance, triggering a rally when they dropped the reference about additional firming that maybe needed. So that got the markets quite excited and we saw rallies in bonds and stock markets around the world.

I don’t know if they quite went all the way to fully shift to a neutral stance, they still emphasized that their predominant policy concern still is the risk of inflation and how recent readings on inflation had been somehow elevated.

Q: While they have removed the word additional firming, their interpretation on inflation as a predominant policy concern could be interpreted as more hawkish than their previous January statement. Do you think the statement should be interpreted as continued neutrality - that there won’t be a rate hike in 2007? Would that be a correct interpretation rather than interpreting it as a possible rate cut in 2007?

A: I certainly wouldn’t think that a rate cut is likely anytime soon and as far as exactly what they emphasized - that it will depend upon how the data turns out. Right now it’s definitely a mixed picture, in fact that’s the phrase they used when they talked about the recent development of economic data.

Q: But what is your own assessment of the kind of data that we have seen so far? Are you expecting that there is a possibility of a rate cut in 2007 going by the data so far?

A: There is a possibility; everyone is focused on the possible problems in the housing market spilling over to other sectors. But for the moment at least the labour market data remains solid and we don’t think that the most likely scenario would be for a cut this year.

Q: Do you think this rising delinquencies on the emphasis on housing market over the time could be assumed as much importance as inflation will in keeping in mind what he will do next with interest rates?

A: They are clearly weighing both factors as they make their policy decision. I think they have quite intentionally left themselves uncommitted at this point. In Action Economics we remain fairly optimistic that economic growth will continue along the lines, even the Fed said that they still see the most likely scenario would be for continued expansion at a moderate pace.

If that is the case then there probably won’t be any easing this year. But they acknowledged, there is the risk that the problems in the subprime housing mortgage market could spillover to consumer spending generally, but interestingly they didn’t make any specific reference to the word subprime mortgages, they just said that the adjustment in the housing sector is still ongoing.