US Fed may reconsider measured pace

March 21 | Updated: Mar 22 2005, 05:30am hrs
Tuesday's meeting of the Federal Reserve's policy-setting Open Market Committee may be one of the last at which US central bankers will say they're satisfied with how the fight to contain inflation is going.

Figures since the FOMC's last meeting show a surge in the prices of oil, commodities and imports, as well as accelerating job growth. Those trends are heightening economists' concerns about inflation and raising speculation the Fed may soon abandon what it calls its measured pace in raising interest rates and boost rates more quickly.

That's a very close call, former Fed governor Laurence H Meyer said about prospects the FOMC might scrap the language in its post-meeting statement. Everybody appreciates that it's going to need to be removed at sometime soon. I would think it's not far off -- possibly at the May or June meeting, he said.

The 22 firms that trade government debt directly with the Fed increasingly share that view. Economists from 13 of the primary dealers say the FOMC will remove measured by June, including three who say the description may become history tomorrow, based on a Bloomberg News survey conducted March 17 and 18. The Fed will raise its benchmark interest rate by a quarter-point tomorrow to 2.75%, the seventh increase in a row, according to 93 of 101 economists in a separate poll.

Fed Chairman Alan Greenspan, in four appearances before Congress since mid-February, didn't use measured to describe the expected rate of increases. Comments by other Fed members suggest they favor leaving the description intact. Each FOMC statement has used it since May. There's clearly a diversity of view within the Fed of what ought to be done, former Fed Governor Lyle Gramley said in an interview.

When asked at a February 16 Senate Banking Committee hearing about whether the Fed may soon scrap the wording, Greenspan said that even though inflation is contained, We're not going to have the same statement in perpetuity. At some point it's going to change. In a similar vein, Atlanta Fed Bank President Jack Guynn said at a February 9 event that you can imagine not too far down the road where some things in the statement aren't going to be appropriate.

Greenspan may want to regain flexibility by shedding the phrase, said Glenn Haberbush, economist at Mizuho Securities USA in Hoboken, New Jersey, and one of three firms that expect the Fed to drop the wording on Tuesday. Two other primary dealers expect it to happen either tomorrow or in May.

By dropping the pledge, they are just untying their hands, and Greenspan hates to have his hands tied, Haberbush said, adding, The Fed is not necessarily implying they will raise rates faster or more aggressively.