US Interest Rate Policy Unchanged

By: Mike Campbell
Despite the withdrawal of some emergency lending measures recently, very few people expected the US Federal Reserve to deviate from its policy of low interest rates when the rate setting committee sat this week. No surprise, then, when it was announced that the rate would stay at its historic level of 0 to 0.25%. The idea is to provide cheap money to US businesses to allow them to make the investments they need to grow and in doing so, boost the US economy and drive the recovery.

The committee concluded that the current indicators of the US economy were mixed and consequently interest rates would need to remain low for an extended period of time. The markets welcomed the news that cheap money would continue to be on offer for the foreseeable future and the Dow Jones closed 30 points higher on the news. The interest rate is often raised as a mechanism to control inflation, but with little inflationary pressure in the US economy at the moment, there is no imperative which will force rates up. A second effect of higher rates is to boost the value of the US Dollar on foreign exchange markets, but the US government seems happy with the value of the Greenback at the moment as a relatively weak Dollar helps US exports.

Although still very high, US unemployment figures seem to have stabilised. The committee cautioned that fear of unemployment could hit the consumer spending which is responsible for 70% of US GDP. US Treasury secretary, Tim Geithner, confirmed this view, adding that the government did not expect to see any major improvement in the hiring situation this year. This is grim news if you are in the 10% of American workers looking for a job.