Thursday 22nd May 2008

Good morning.

Minutes and Oil highlight Fed dilemma

Congratulations to Man Utd and commiserations to Chelsea after a superb European Cup Final in Moscow last night.

Another ‘close call’ at the Federal Reserve who released the minutes of their April 30th meeting yesterday. Their task in controlling the US economy is not an enviable one. The decision to cut rates at that meeting was certainly not unanimous with members highlighting ongoing inflationary concerns. Yesterday’s latest surge in oil prices hardly helps their cause. Oil surged past the $133 mark fuelled by fears of a global shortage. Policymakers at the Fed are going to find it increasingly hard to weigh up the dual mandate of controlling inflation by hiking interest rates and encouraging spending and growth by cutting them. The minutes showed that the Fed’s easing bias is drawing to a close with a more neutral stance to come.

The Bank of England’s Money Policy Committee faces the same dilemma. The minutes of this month’s meeting showed the 9-strong team voting 8-1 in favour of keeping rates on hold. Blanchflower was the predictable dissenter voting for a cut.

They also showed that there was a general reluctance to cut rates at the moment so as not to be seen specifically targeting growth which could in turn have spooked the market about future implications for inflation. Many analysts are now targeting November for the next rate cut. Expect sentiment on this to shift as economic data drips through in the coming months.

The Euro was the winner on the currency markets again which was not only benefiting from uncertainty surrounding future Dollar and Sterling yields but had independent support from the IFO Institute’s business climate index which rose to 103.5 in May from 102.4 in April. The survey signalled that the German economy was showing strong resilience to the US slowdown. The single currency hit one-month highs against Sterling and the Dollar.

UK Retail Sales figures for April are due at 9.30am

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