Fed unlikely to tighten policy in spite of global crisis

The U.S. Federal Reserve is unlikely to tighten policy by either raising rates or halting the second edition of the asset purchase program known as QE2, when its policy board meets today, according to an analyst.

The Federal Open Market Committee (FOMC) is meeting after an eventful week in which the world's third largest economy was battered insanely by the triple blow of a high magnitude earthquake, a devastating tsunami and an unfolding nuclear crisis.

The global economic scene is also marred by negative sentiments emanating from the continued unrest in the oil exporting hub of the Middle East as well as Eurozone's persistent debt crisis. Though the global crisis has spawned talk of stagflation fears, the Fed will almost certainly continue with its planned asset purchase program, while there was no real chance of setting out a rate hike plan for the near future, according to a Capital Economics analyst.

Despite signs that other central banks may be preparing to tighten policy, we don’t expect to see the Fed following suit, either by calling an early halt to QE2 or raising interest rates later this year, Capital Economics analyst Paul Ashworth said in a note.

The Fed will reiterate its plans to buy a total of $600 billion of Treasury securities by mid-year while it will also acknowledge the improvement evident in the recent economic data, particularly the decline in the unemployment rate over the past three months, Ashworth noted.

The Fed will also take into account the prospect of continued uncertainty in the oil market which has caused a spike in fuel prices. There are already concerns that northward-sprinting oil prices could bring about a soft patch in economic recovery.