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.”
He added, “This brings forward the time that the greenback spikes and the Australian dollar falls and this will help our stock market which is still about 1,200 points off its all-time high made in November 2007.”
Frequently Asked Questions about this Article…
The US Federal Reserve decided to keep interest rates near zero because, despite positive economic news, they believe there is still significant slack in the labor market. The Federal Open Market Committee (FOMC) wants to ensure continued economic support until a more comprehensive assessment of economic indicators, such as unemployment and inflation, suggests a change is necessary.
The Federal Reserve is closely monitoring economic indicators like the labor market and inflation. Currently, unemployment has fallen to 6.1%, and inflation remains below the Committee's long-term goal of 2%. These factors are crucial in determining any future changes to monetary policy.
Recent data shows that the US economy is performing well, with the gross domestic product growing at an annualized rate of 4% in the second quarter of 2014, surpassing the expected rate of 3%. Household spending is rising moderately, and business fixed investment is advancing, although the housing sector recovery remains flat.
The Federal Reserve decided to reduce its monthly bond-buying program. Starting in August, they will purchase agency mortgage-backed securities at a pace of $10 billion per month instead of $15 billion, and longer-term Treasury securities at $15 billion per month instead of $20 billion.
According to investment commentator Peter Switzer, the Federal Reserve's decisions could lead to an earlier-than-expected rate hike, causing the US dollar to strengthen and the Australian dollar to weaken. This shift could benefit the Australian stock market, which is still about 1,200 points below its all-time high from November 2007.
The FOMC believes there is still major slack in the US labor market, which is why they are maintaining accommodative monetary policies. Despite the unemployment rate falling to 6.1%, they see the need for continued support to ensure a robust recovery.
The current inflation rate is below the Federal Reserve's long-term goal of 2%. This lower-than-target inflation rate is one of the reasons the Federal Reserve is maintaining its accommodative monetary policy to support economic growth.
Based on current economic conditions, the Federal Reserve may consider raising interest rates earlier than previously expected if the economy continues to improve. However, any decision will depend on a comprehensive assessment of various economic indicators, including labor market conditions and inflation.
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