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What's So Exciting About Ben Bernanke's First Meeting?

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They may not be as absorbing as the Da Vinci Code, but the minutes of the US Federal Open Market Committee (FOMC) which governs US interest rates, have certainly caused a stir. Observers were surprised by the indication that the policy of gradual interest rate rises may be ending.

The eagerly-awaited (by some) FOMC minutes were the first covering a meeting held under the new Fed Reserve chairman, Ben Bernanke. It took place on March 27-28.

Bernanke took over from his veteran predecessor Alan Greenspan in January. Analysts have been desperately keen to see in which direction he plans to take the Fed Reserve. Many thought the committee under his guidance would stick with the upward trend n interest rates.

Under Greenspan, the FOMC pursued a policy of gradual interest increases with the aim of cooling inflationary pressures. But according to minutes from the March's FOMC meeting, "some [members] expressed concerns about the dangers of tightening too much, given the lags in the effects of policy".

Rising energy costs were pushing other commodity prices higher. But the signs were, the minutes report, "that underlying inflation was not in the process of moving higher".

However, members "also recognised that in current circumstances, checking upside risks to inflation was important to sustaining good economic performance".

These comments came as a surprise. They seemed to contradict an earlier statement which implied that the committee felt that further "policy firming may be needed".

Nearly everyone thought this meant that rates would continue climbing for the future, as per Greenspan. But apparently not.

The prospect of an unexpected end to interest rate rises set the markets ablaze with the Dow Jones index up 194.99 points to close at 11,268.77.

Excitement also ran rife in Japan. The Nikkei 225 rose 117 points to 17,350. “The Fed minutes were a positive surprise as investors hadn't anticipated an end to interest rate increases at the time of the meeting,'' said Takashi Kamiya, chief strategist at T&D Asset Management Co. in Tokyo.

The US dollar weakened on the news.

With reassurance from the Fed, investors are now likely to focus more on earnings, which are flooding in this week and next. If company results show they've managed to weather higher prices for energy and other commodities, Wall Street could have the incentive to continue a rally started in March, but stalled in recent weeks.

Some analysts, however still expect the Fed Reserve to increase the cost of borrowing by a further quarter percentage point in the near future. But most believe any rise to 5% would mark - at least for the time being - an end to the current policy.

"I think it's important to recognise that inflation is where the Fed wants to be," said Dana Johnson, chief economist at US financial services company Comerica. "They don't want to overshoot. I think they will pause real soon."

Clearly keen to make a lasting impression, the minutes also show that Mr Bernanke radically suggested two day meetings to the committee, rather than the customary one. Feeling such important decisions require extensive consideration, however, it was decided to postpone any action until the May meeting. Longer meetings will mean more minutes of course.

Ben Bernanke, who was seen by some as a potential Greenspan clone, is clearly capable of a few surprises of his own. Let’s hope that the May meeting minutes of the FOMC make further fascinating reading.

Edited by munimula

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