By: Dr. Mike Campbell
The remit of the US Federal Reserve is to set monetary policy (independent of political influence, of course) in order to achieve maximum employment, price stability and moderate long-term interest rates (in other words, interest rates will be rising from current historic lows sooner or later…). Often, the disparate goals of the Federal Reserve can lead to conflicting pressures; for instance, currently, control of inflation (price stability) is a lower priority than measures to promote employment by stimulating economic growth.
Speaking to economists in Virginia, the Chairman of the Federal Reserve, Ben Bernanke, said that despite recent improvements which have seen an average of
240 000 new jobs created per month between December and February, US employment remained weak. "Despite the recent improvement, the job market remains far from normal. The number of people working and total hours worked are still significantly below pre-crisis peaks," Mr Bernanke said. The current level of unemployment is 8.3% which compares poorly to the long-term average of 5.7%.
Mr Bernanke said that the Fed needed to “remain cautious” and this message was interpreted by market watchers to suggest that the current supportive monetary policy with its low interest rates would remain in force for the foreseeable future. This reading of the tealeaves was enough to push the S&P 500 to its highest close since May 2008 (up 1.4%); the Nasdaq made 1.8% and ended at its best closing position since November 2000. The Dow Jones also closed higher by 1.2%, breaching the 14000 mark to close at 12165.51 points. The Fed remains concerned that the lack lustre recovery in the USA might falter, so supportive measures are likely to be retained at the expense of reigning in inflation for the time being – especially since inflationary pressure within the US economy is currently mild; currently inflation is running at 2.9% in America.