U.S. Federal Reserve. Expert opinion

The Federal Reserve is unlikely to be quick to raise rates

John M. Berry - Analyst, "Bloomberg News" gives its opinion.

Federal Reserve Chairman Alan Greenspan made it clear in his speech on Wednesday in the U.S. Congress that when the Fed makes its first move to increase interest rates, it is not likely to be the beginning of rapid growth rates.

Greenspan explained that the Central Bank kept its interest rate at 1% for so long, not because nothing has changed, but because the representatives of the Federal Reserve thinks "the strategic level."

While Greenspan did not announced all of this, the strategy of the Federal Reserve was to keep rates unusually low to prevent deflation, and at the same time, Left Behind stimulate economic growth.

"The basic difference between what was and what is happening now is an extraordinary productivity acceleration," said Head of the Federal Reserve one of the members of Congress to question why the Fed has not taken already raising rates.

"Price pressure is far from what it should be under normal circumstances," said Greenspan. "Normal is the restoration, in which staff costs are rising, not falling, while inflation was already higher than the Fed would like."

And price pressures are not going to go back to "normal", while productivity growth has not significantly slowed and the pace of wage increases has not accelerate. Greenspan predicts that this process will soon begin, and that some growth is already reflected in earnings, because the share of national income transferred starts working in higher wages.

Labor costs
How fast and how high the Fed will eventually want to raise rates will depend mainly on the fact whether there is already, and to what extent the turnaround trend in labor costs.

At some points, it was Greenspan's speech, it was not clear whether he had described what happened in the past or what might happen in the future. However, there is no reason to think that the Fed will change its approach to the question of interest rates based on a careful balance between the benefits and risks.

As Greenspan put it, "when considering the specific potential inflationary problems must take into account all the elements involved in this situation. And remember that any monetary policy that you Take, carries risks. And you have to balance between risks and benefits."

Future improve
Another question, which asked Greenspan - long as the Fed continues to raise rates usually, after beginning to do so.

"Once we begin to raise rates, we have continued it is usually over a long period," said Greenspan. "Even though such periods usually lasted a year or so, we should not think that this will necessarily occur in the future. There is no temporary association with the test program carried out by the Federal Reserve."

In other words, people are deploying market warrants based on future steps the Federal Reserve must be careful. Remember the standard warning to investors: Past action is not a guide to future actions.

What we do know from the remarks made by Greenspan and his colleagues, it is only that if the economy will continue its recovery as expected, the Federal Reserve at some point raise its 1% of th bet.

None of the Federal Open Market Committee (FOMC) has no doubt that the current rates will cease to conform to the conditions as soon as it becomes clear that the economy will grow enough to provide new jobs needed to reduce U.S. unemployment.

The good news for Greenspan and the FOMC is that with such low inflation, they can remain "patient" even after decide to raise your bid. The Committee is unlikely to be to try to agree on a specific series of growth rates, when they decide to make first increment.

Bloomberg.com