U.S. Federal Reserve Hints at Interest Rate Increase

On May 4, the U.S. Federal Reserve Bank (FRB) decided to maintain the existing interest rate of one percent on federal funds.

However, in an announcement made after the Federal Open Market Committee (FOMC) conference, the FRB hinted that an increase in the near future is likely because they deleted the phrase “be patient with an increase in the interest rate” that they announced during last month’s conference.

Instead, they used the expression: “adjustment of the interest rate policy will be eliminated at a pace that is likely to be measured.” This might be an indication that the FRB is preparing a gradual step-by-step measure for an increase of the interest rate.

In addition, the FRB deleted the part that said: “there is a risk of deflation in the U.S. economy,” and proposed an optimistic outlook on the economy by mentioning the recovery of employment rates and the escalating speed of production. Alongside, they lowered concerns of an abrupt increase in the interest rate by announcing that “control of long term inflation has been dealt with well.”

Because the results of the conference came out as expected, the New York stock market showed signs of a sharp rally. However, it slowed down due to the incessant criticism of the time and range of the increase in the interest rate.

Bill Gross, who runs the world`s biggest bond fund at Pacific Investment Management Co. (PIMCO) predicted that “in the next six to nine months, the standard interest rate will increase to 2 percent as the interest rate will rise 0.25 percentage points.”

Analysts predict that the time and range of the FRB’s increase of the interest rate will be affected by the economic indices of the next several months, and by employment statistics in particular.

Kwon-Heui Hong konihong@donga.com