US FED Reserve to Maintain its Interest Rates

Wednesday, March 17, 2010

Last night the US Federal Reserve announced that it would continue to maintain the benchmark interest rate at 0.25% while giving an indication that US economic recovery was gathering momentum. The Fed said that the labor market was “stabilizing” which is a more optimistic view than was voiced at the last meeting in January when the committee said only that deterioration in the labor market was “abating”. The banks hint that the economic outlook is becoming more positive has fuelled speculation that it will move away from its promise to keep borrowing costs close to zero and that rate hikes may come in the next several months.

The Fed has held the benchmark interest rate near zero since December 2008 to shore up the US economy and help it through the most severe global recession in decades. Last March it committed to holding rates very low for “an extended period”. The US economy resumed growth in the second half of last year and grew by 5.9% in the last quarter.

The US Dollar fell against both the Euro and the Yen in the forex online market following the announcement. It opened the day trading at 1.3671 against the Euro before dropping to 1.3762 by the day's close. It closed at 90.31 JYP having started the day trading at 90.41 JPY.

Two factors believed to have contributed to the Fed’s interest rate decision included housing starts data and import price data, both of which were announced earlier yesterday. Housing starts in the US fell in February as record snowfall in parts of the country hampered construction. Also fewer building permits were issued signaling that demand is slackening.
Builders started construction on 575,000 new homes last month. This is a decrease of 5.9% on the previous month's upwardly revised figure of 611,000. Increasing numbers of foreclosures are making it more difficult to clear backlogs and are discouraging new construction.

A separate report showed that the price of goods imported into the US dropped more than expected last month, indicating few signs of inflationary pressure from abroad. The import price index fell 0.3%, its first decline in seven months. The current lack of growth in the labor market that could stimulate demand in the housing sector as well as the lack of inflationary signals contributed to the Federal Reserve's decision to maintain the benchmark interest rate at its current level. The producer price index is due to be announced later today with a drop of 0.2% expected. This figure serves as a warm up for the consumer price index which will be published tomorrow. This figure will be closely watched as any increase in consumer prices is key in terms of future rate hikes.

Later tonight Federal Reserve Chairman Ben Bernanke is due to testify, along with former Federal Reserve Chairman Paul Volcker, on a link between Fed Bank supervision and monetary policy before the House Financial Services Committee, in Washington. These speeches are always closely watched as they can contain important indicators for the future direction of interest rates.

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