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Tuesday May 24, 11:35
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OECD OKs Fed rate hikes, calls for easing in eurozone
(by Julia Jenson)
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The Paris-based OECD’s forecast released on Tuesday confirms that the US Fed is on the right track saying that the US monetary authorities need to continue with rate hikes, but easing monetary policy is prescribed for the eurozone that needs to reform its economy to make it better suitable for coping with shocks from the outside such raid exchange rate fluctuations or sharp rise in oil prices.
The OECD upped its growth forecasts for the US to 3.6% in 2005 from 3.3% mentioned in the previous semi-annual report. For 2006 the US growth forecast is at 3.3%.
“The U.S. Federal Reserve ... is set to continue to bring its policy rates up towards neutrality. In contrast, no monetary tightening is assumed in Japan in the near term, and easing is built in for the euro area,” OECD report said.
Euro-area growth forecast has been reduced to 1.2% from 1.9% and prediction for Japanese growth has been taken down to 1.5% from 2.1%. The data for Europe assume that there are no more external shocks and the European Central Bank will slash interest rates by at least one-quarter percentage point.
The OECD’s forecast has certain consequences for the subsequent moves in the interest rates and as a result will impact the value of the dollar. The fact cited by the OECD in relationship to the core inflation, namely, that higher energy costs and imports are seeping through into core inflation, puts pressure on the Fed to continue with rate increases in its next meeting.
Today the minutes of the latest meeting on May 3 will be released, helping to shed light on the Fed’s way of thinking that might impact its future decisions.
GDP growth is expected to be pinpointed at 3.7% in the numbers that are due to be released by the US government on May 26, up from last month’s 3.1%. Despite the slowdown in economic growth, the US will still be the leader of the industrialised world in the rate of economic expansion.
Another piece of data that will be released soon and will impact the dollar value will be the Personal Income and Personal Spending indices that are expected to be equal to 0.6% and 0.8% in April, up from 0.5% and 0.6% in March respectively. Strength in consumer earnings and spending will add to the incentives for the Fed to raise interest rates in the next meeting.
Treasurys gained on Tuesday, with yields on the 10-year not dropping to 4.014% from 4.072% late Monday. The continuation of the rally was sparked by concerns over political uncertainty in Europe.
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