Fed to extend strategy of nudging up rates

Odds are the US Federal Reserve this week will extend a steady-as-it-goes strategy of nudging interest rates up in quarter-percentage point steps, pledging more of the same while keeping a wary eye on prices.

Despite signs some officials on the Fed's policy panel were growing restive about words in its post-meeting statement forecasting "measured" rises, which have taken the target federal funds rate to 2.5 per cent in six successive moves, it's likely too soon to scrap the language, analysts said.

One reason is that soaring oil prices have created some worry about their potential drag on economic growth and another is that Fed policy-makers, who have worked to make their decision-making less opaque, have not yet signalled they are on the cusp of policy change.

"At some point they will depart from this very, very regimented course," said Richard DeKaser, chief economist for National City Corp in Cleveland, "But I just don't think we're there yet."

In February testimony to Congress, Fed chairman Alan Greenspan sealed the direction of policy by saying rates remained "fairly low" after six hikes from a 46-year low of 1 per cent in June.

So rates are going up, at least over the near term.

The only real drama is when the Fed will decide the federal funds rate is close enough to "neutral" - a level that neither spurs nor hinders growth - that it can drop a pledge of measured rises.

Doing so would give it more leeway to respond to economic trends, including to data indicating problematic price pressures that might potentially call for larger increases.

"Dropping the language is now just a matter of timing," London-based Capital Economics predicted in a commentary on Friday. But it added that it expected the "measured" wording to remain "for the time being". Fed officials have not evinced any sharp discontent with current strategy.

Fed governor Ben Bernanke said last month the pace of price rises was not yet threatening: "I currently think inflation remains well-controlled, therefore I'm comfortable with our policy of removing accommodation at a measured pace." - (Reuters)