Fed raises rates, BoE may not, BoJ still likely to

Yesterday, the Federal Reserve raised interest rates as expected. From Reuters:

The Federal Reserve lifted interest rates for a 16th straight time on Wednesday and, while leaving the door open to a possible pause, said it would keep raising them if necessary to check inflation.

In announcing its decision, the Fed emphasized that future moves would be highly dependent on how the economic outlook unfolds and it scaled back the forward-looking guidance it had been giving financial markets.

The unanimous decision by the central bank's policy-setting Federal Open Market Committee took the benchmark federal funds rate target up a quarter-percentage point to 5 percent, its highest since April 2001.

The Fed is now clearly in data-dependent territory, and since there was no major economic news from the US yesterday, let's move elsewhere.

Across the Atlantic, despite recent strong increases in raw material costs and retail sales in the UK, the Bank of England sees little need for an interest rate hike this year. From Reuters:

The Bank of England tempered expectations that interest rates will rise this year after it said on Wednesday hardly any tightening was needed to keep inflation on course to hit its target...

The Bank said inflation would probably rise later this year on the back of higher energy and import costs but then fall back to the 2.0 percent target in two years -- the central bank's usual policy horizon.

And that is assuming interest rates slope upwards only very gently -- to 4.6 percent by the end of the year, 4.7 percent by the middle of 2007 and peaking at 4.9 percent throughout 2008...

On economic growth, the Bank painted a slightly weaker picture than in February but removed the downside bias to its forecast.

It said growth was likely to stay close to its long-run average over the next three years, underpinned by steady expansion in consumer spending as a housing market revival continues.

An interest rate rise appears more likely in Japan, but even there, leading indicators are falling. From the Conference Board:

The Conference Board reports today that the leading index for Japan decreased 0.2 percent and the coincident index decreased 0.3 percent in March.

The leading index fell slightly in March, the first decline in the last ten months. The leading index has been growing at about a 3.5 -4.5 percent annual rate in recent months, up from zero to slightly negative growth at the end of 2004. But its growth in 2005 and through the first quarter of 2006 has not been as rapid as in the first half of 2004. In addition, the strengths and weaknesses among the leading indicators have been somewhat balanced in recent months.

And from Reuters:

The diffusion index of coincident indicators...fell to 11.1, down from 50.0 in February, Cabinet Office data showed on Tuesday...

But its sister index...remained above 50 for the sixth month in March, though at 60.0 it was down from February's dizzying heights of 90.9.