“Zen International”: Officials at the US Federal reserve have admitted that its zero interest rate policy is fueling excessive risk-taking and may be “un-anchoring inflation expectations”.

The admissions were contained in the minutes of the last meeting of the Federal Open Market Committee (FOMC). The US dollar has fallen as investors have bet that the central bank will tolerate its continuing decline in order to revive the US economy.

Analysts at “Zen International” have suggested for some time that the recovery in the US economy is out of kilter with the recovery in the equity markets. They apparently feel that the cheap money being made available by various Federal Reserve facilities have effectively provided investors and speculators with funding to engage in investment in riskier assets like equities and commodities.

Despite the clear warning signals, “Zen International” believes that the Federal Reserve is unlikely to be in a position to raise interest rates before the 2nd quarter of 2010 for fear of hampering the fragile recovery.

The weak dollar is becoming a bone of contention for the Chinese government which is America’s largest creditor with some $2 trillion of dollar-denominated assets in its foreign reserves but “Zen International” analysts suggest that there is little the Chinese can do about the situation given the depth of their exposure to the US.

The firm does believe, however, that the Chinese will continue to diversify their holdings away from the dollar by investing in hard assets like oil and gold.