The Federal Reserve warned this week that financial markets remained under heavy pressure as it announced that it was holding American interest rates at 2%.
Despite concerns about inflationary pressure, United State’s central bank cited rising unemployment and a plunging housing market as its reasons for leaving borrowing costs unchanged.
Wall Street had feared that the Fed might start to reverse the sharp easing of policy in response to a rising cost of living in the world’s biggest economy, but in the event only one member of the bank’s open- market committee — Richard Fisher — favoured higher rates.
In a statement, the Fed said that the hefty cut in its fed funds rate from 5,25% a year ago would eventually help underpin the economy, but stressed that it only expected a modest pick-up in activity.
“Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. But labour markets have softened further and financial markets remain under considerable stress.
Tight credit conditions, the ongoing housing contraction and elevated energy prices are likely to weigh on economic growth over the next few quarters.
Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth,” the Fed said.
Tuesday night’s announcement followed a survey showing that activity in the US service sector stagnated in July.
Manufacturing is also struggling to grow, while unemployment has been rising as the fallout from the plunging housing market spreads to the rest of the economy.
The Fed has expressed concern in recent months about rising inflation prompted by higher global food and fuel prices, but gave no hint yesterday that it was planning to raise rates in the near future.
“Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated.
The committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.
Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the committee.
The committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.”
Neil Michael, head of quantitative strategies for SPA ETF, said: “The Fed is well aware that confidence in the US economy is still fragile — the well-documented credit crunch has certainly slowed US economic growth — but the latest figures show the US economy is still growing and only time will tell if earlier rate cuts will repair some of the damage done.” —