By: Dr. Mike Campbell

There is an old saying that “a week is a long time in politics”. Nearly three years is an eternity in economics, however, the US Federal Reserve have just announced that they intend to leave their rates on hold for this period. To be accurate, the Fed said that they did not expect to increase rates before the last few months of 2014, they did not give an iron-clad guarantee that rates would not rise above their current 0 to 0.25% level should something unforeseen happen, of course.

The idea behind low interest rates is that it allows banks to offer “cheap” money to business in a bid to stoke the economic fires and generate growth. The downside risk of this strategy is that inflation will increase, of course. The Fed is of the opinion that inflation is not currently a concern in the US economy. It also set a target for inflation of 2% for the first time; in the past, the Fed had preferred to use a target range for inflation. The Federal Reserve is convinced that inflationary pressure within the US economy is under control and is no longer watching it closely.

In making their announcement, the Fed warned of significant downside risks to the US economy and noted that it "expects to maintain a highly accommodative stance for monetary policy". No additional quantitative easing measures were outlined for the time being.

In a move for more transparency, the Federal Reserve published details of the views of the 17 members making up the committee with respect to interest rates. Clearly, there is a diversity of opinions within the group: three members believe rates should rise this year; six suggest that this should happen by the end of next year. Six people expect rates to remain at their historic low by the end of 2014 whilst one member anticipates that interest rates will be a 2.75% by then.