The Fed leaves rates at 2% but their turn upward bias in inflation

Washington - June 25, 2008 - The U.S. Federal Reserve kept interest rates unchanged at 2%, following its meeting two days after the campaign downs that began in 2007 and which resulted in seven consecutive cuts , Some of them historical, equivalent to 325 basis points. The U.S. central bank said that the risks of growth appear to have declined somewhat, but that inflation, above all expectations, rising.

"The upside risks to inflation and inflation expectations have risen," said Ben Bernanke and his governors in the communiqué following their meeting. Anyway, expecting that prices will be relaxed during this year and next ensuring, however, that high energy prices are an uncertainty that makes forecasts remain high.

So much so that the decision to keep rates unchanged was not taken unanimously: Richard W. Fisher voted to raise interest.

"The narrow credit terms, the contraction in housing and rising energy prices continue to weigh on economic growth in coming quarters," explains the institution in its statement.

However, although both the labour market as financial markets "remain under considerable strain", "the economy continues to expand partly reflecting the strong household spending," he concluded.

The ECB reiterated its "maximum alert" and experts predict two increases in rates until the end of the year

The president of the European Central Bank (ECB), Jean-Claude Trichet said today that risks to price stability "have increased" as a result of the escalation in oil prices and food, and warned that the institution maintains a degree of "maximum alert" in the fight against inflation. How many times the ECB will raise rates this year? We expect at least two movements.

In an appearance before the committee on Economic Affairs of the Parliament, Trichet repeated the same message that launched after the last meeting of the ECB's Governing Council last June 5. At that time, made it clear that in order to anchor inflation expectations the Bank in July could increase interest rates a quarter point to 4.25%.

"Maximum Alert"

"We are in a state of maximum alert. The Governing Council will continue to monitor very closely all developments," Trichet said this Wednesday to eurodeputies. The ECB is committed to "prevent the effects of second round and the materialization of the upside risks to price stability over the medium term," he said.

"The Governing Council is determined to ensure the anchoring of inflation expectations in line with price stability. This anchoring of inflation expectations in the medium and long term is a prerequisite for monetary policy to contribute to sustainable economic growth and the creation of jobs in the eurozone, "insisted the president of the ECB.

He attributed the rise in inflation to increased oil prices and food and predicted that the price level will remain high over the coming months and will start to "exercise restraint" in 2009. In this sense, explained that, according to projections of the ECB, inflation will be between 3.2% and 3.6% in 2008 and between 1.8% and 3% in 2009.

"Inflationary spiral" in prices

Trichet insisted that the risk of an "inflationary spiral" in prices and wages is "serious", especially in countries where widespread indexation clauses in wages, and called for restraint in wage negotiations to avoid the effects of second round.

As regards to growth, the ECB president said that the fundamentals of the economy in the eurozone are "solid" and that there were no "significant imbalances". However, he admitted that the "uncertainty about the outlook for growth remains high" and that there were "risks to the bottom" by the impact of financial turbulence and catkin of inflation.

Source: El Economista