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Washington: The US Federal Reserve on Wednesday took a page out of its 2003 playbook by tweaking the language of a policy statement to communicate a conditional halt in its campaign of interest rate cuts.
After a two-day meeting, policy-makers lowered the overnight benchmark rate by 25 basis points to two per cent, as expected. At the same time, they emphasised the size of the total, 3.25-percentage-point reduction in the rate since September, while acknowledging the economy remains fragile.
Moreover, the Fed's statement dropped a clear signal to definitely expect further rate cuts by omitting the phrase "downside risks to growth remain". The phrase was featured in its statements on March 18 and January 30, when the Fed lowered rates by a cumulative 125 basis points.
That language tempered the more assertive wording of its statement on January 22, when an emergency cut of 75 basis points was made and the Fed warned that "appreciable downside risks to growth remain".
On Wednesday, the central bank also reshaped the final sentence of the main body of its policy statement to restore the phrase "will act as needed". That compares with the slightly more directed "will act in a timely manner", employed since January.
The Fed introduced the earlier wording to warn markets it could move between meetings to shield the economy from the chilling impact of the housing crisis, as it did on January 22.
"The Fed has shut the door on additional rate cuts, but the door remains unlocked in the event that additional financial market and credit-related events surface," said Richard Yamarone at Argus Research.
Interest rate futures imply the Fed staying at two per cent until the latter part of the year, with a modest, 24 per cent likelihood, priced in to markets that it will trim another quarter percentage point at its meeting in late June.
In June 2003, when the Fed rested after a long rate-cutting campaign to one per cent, it also jettisoned specific wording that pointed to more action.
Back then, the Fed substituted the phrase, "taken together, the balance of risks to achieving its goal is weighted toward weakness in the foreseeable future", from the previous meeting on May 6, and instead talked up the risks of inflation.
Inflation
This time around the Fed also expanded its discussion of inflation, noting that while core inflation has moderated somewhat, "energy and other commodity prices have increased, and some indicators of inflation expectations have risen."
It used the word "inflation" five times, the same number as its March 18 policy statement. But this time the Fed warned that "uncertainty about the inflation outlook remains high."
That was a slightly more adamant construction than the wording in March that warned "uncertainty about the inflation outlook has increased".
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