Interest Rates Could Rise Amidst Inflation Fears

[Apr 26, 2007.]

Evidence is mounting that interest rates could rise in the next year in an effort to hold down inflation. Officials at the Federal Reserve insist that inflation is still the greatest threat to the U.S. economy, although they are also worried about the possibility of an economic slowdown.

As a result, many investors now believe that an interest rate cut in the short-term is not likely to come about.

The Fed has edited out language indicating that it is in favor of "additional firming" of interest rates in a recent statement. This marks the first time such language has been deleted from a Fed statement since Ben S. Bernanke assumed the helm of the Federal Reserve in February of 2006.

The Fed recently decided to keep short-term interest rates at 5.25 percent, rather than opt for a decrease in the rates.

Minutes from a recent Fed meeting stated, "In light of the increased uncertainty about the outlook for both growth and inflation, the committee also agreed that the statement should no longer cite only the possibility of further firming.

"Instead, the statement should indicate that future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth."

As of February, the Fed was forecasting economic growth at 2.5 to 3 percent for 2007 and 2.75 to 3 percent for 2008. Meanwhile, the Fed predicted an unemployment rate of between 4.5 and 4.75 percent for 2007 and a similar jobless rate for 2008.

Still, some observers continue to express optimism for the U.S. economy for the year ahead, indicating fears of either a significant inflation surge or notable economic slowdown may be misplaced.

Meanwhile, the U.S. trade deficit declined slightly from January from February. The figure dropped from $58.88 billion to $58.44 billion over that time period.

Julie-Ann Amos
26th April 2007

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