Rates on hold as US economy continues to rebound

As widely expected the US Federal Reserve left interest rates on hold near zero this week, despite better economic news out for the world’s biggest economy.  

US gross domestic product grew at an annualised 4% in the second quarter of 2014, well above the expected rate of 3%.

According to a statement from the Federal Open Market Committee (FOMC), which is chaired by Janet Yellen, any change to monetary policy will only occur after a wide assessment of economic indicators, such as the labor market and inflation. Although, the outlook for both appears sound with unemployment falling to 6.1%, while inflation is below the Committee’s long-term goal of 2%.

Terry Sheehan, an economic analyst at Stone & McCarthy Research Associates in Princeton, New Jersey told Bloomberg that the decision by the FOMC “reflects Chair Yellen’s firmly held belief that there’s still major slack in the labour market and as part of their mandate they need to continue to provide accommodation for some time,” said.

The FOMC also noted that household spending appears to be rising moderately and business fixed investment is advancing, although the recovery in the housing sector remains flat.

The FOMC also voted to cut its monthly bond-buying program, which investment markets broadly predicted.

Beginning in August, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month rather than $15 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion per month rather than $20 billion per month.

Leading investment commentator, Peter Switzer from Switzer Financial Planning, says the better economic means the “Fed will raise rates earlier than was expected.”