Fed keeps rates unchanged; Buffet advises caution

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The US Federal Reserve has kept the benchmark federal funds rate unchanged at 2 percent. Holding interest rates steady, the FOMC (Federal Open Market Committee) focused more on the growing risk of inflation. The FOMC statement said – “Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.”

It was the first time the Fed has held rates steady at a policy-setting session since embarking on a series of rate reductions in September.

The Fed also said – “The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.”

Warren Buffet, Chairman & CEO, Berkshire Hathaway said, “I think inflation is really picking up. So I think the Fed has to be very careful before they do anything that signals that they regard inflation as a secondary thing; that they will worry about later. It’s huge right now, whether it is steel, oil - you name it; the pressure you've seen in chemical prices recently with what Dow's announced -you see it in every place.”

On the dollar, Buffet said, “Over time, if we keep doing what we are doing and it isn't the Fed - it starts with policy makers and Congress; if we keep doing what we are doing, we are going to get the same result, which is the weakening dollar in terms of running huge current account deficits. And part of that stems from oil. A lot of things go into that. But it is true that we can't send USD 2 billion a day out to the rest of the world and not expect the dollar to go weaker over time. That's not a short-term forecast. That's going to happen over time.”

Eric Ross, Canaccord Adams, said, “The Fed is actually admitting in a lot of language that it used yesterday that it is in a tough place. It knows that the economy is going to get tougher, that inflation is really a big concern for the world, that even if oil comes down, they are still looking for other sorts of inflation food inflation, housing bubble; that they are going to have to work against.”

James Bianco, Bianco Research said, “I was a little disappointed by the wording. I was expecting something a little more definitive about raising interest rates. My fear is, we talk about oil speculation - these speculators in oil are being inspired by an East Fed and if the Fed wants to stay easy, if the Fed wants to find reasons to stall off the eventual raise in rates, we're going to continue to see oil go higher. When they cut 25bps in January price of crude oil was USD85 per barrel, USD50 higher now - we risk the price going a lot higher unless they do something to curb these inflation expectations.”

According to John Kattar of Eastern Investment Advisors, Fed decision of not hiking the rates was right, given the continuing weakness in the banking sector. He feels that fed’s decision get frequently reversed. He has a positive outlook on stocks. He said that it is hard to see how they could have moved on interest rates given the weakness in the economy. At the same time, he feels that they stepped up their rhetoric on inflation front, reaffirming their credentials, paving the way for rated down the road. He feels that inflation is the biggest problem, and they will ultimately raise rates, if not now.

Harvey Pitt, Former SEC (United States Securities and Exchange Commission) Chairman said, "When you have bad economic times it prompts people to make bad decisions, and that can lead to violations of law. So, there may be an increase in the amount of misconduct that's going on because of the economic conditions."