All Eyes on the Fed this week

All eyes will be on the US Federal Reserve this week as they meet on Tuesday 16 May to review the US economy, the inflation outlook and therefore the future direction of interest rates.

Federal Reserve Chairman, Alan Greenspan is widely expected to increase rates yet again, but on this occasion there is speculation whether the increase will be the standard 0.25% rise that the market has become used to, or whether there will be a jump of 0.5%.

Following the shakeout in equity markets in the US, which Greenspan has been warning of for some time; he will want to slow the economy without further spooking the markets. He may well take the view that the markets have already had a certain amount of their excesses already removed and that a 0.5% rise may be the only way he can slow the US economy.

A rise in the US is likely to keep the Aussie dollar under pressure, but is unlikely to trigger a copy-cat rise from the Reserve Bank who we expect to keep rates held for the next 3 to 4 months as they wait for the effect of the previous rate rise and the GST to take effect.