Fed decides to leave US interest rates unchanged

 

THE US Federal Reserve, despite recent signs of powerful US economic growth, yesterday decided to leave interest rates unchanged. The widely expected decision came at the end of a two day meeting of the Federal Reserves 12 member Open Market Committee, which meets roughly every six weeks to debate monetary policy.

A statement following the session offered no explanation or description of the meeting.

Analysts had predicted that, in light of modest first quarter growth of 2.2 per cent and with inflation running at below 3 per cent, the Fed would make no move to raise interest rates.

But speculation that at least some members of the committee might be tempted to intervene intensified after the publication this week of two particularly strong reports.

The Commerce Department earlier yesterday said factory orders surged 1.9 per cent in May to their highest level on record. On Tuesday it disclosed that new home sales jumped 7.5 per cent in May to a seasonally adjusted annual rate of 828,000 units, their highest level since 1986.

Both reports pointed to a robust economy that could be on the verge of overheating, thus triggering a spurt in inflation.

But the committee apparently decided the economy still had some room to expand without igniting a round of price increases.

The Open Market Committee can influence the cost of credit in, the economy through a target rate - known as the federal funds rate - that banks use to set overnight loans among themselves.

The committee last changed the federal funds rate in January, lowering it a quarter of a point to 5.25 per cent, and took no action at two subsequent meetings prior to yesterday's session.

Economists in the US foresee impressive second quarter growth, with gross domestic product expanding at an annual rate of around 4 per cent following a rate of 2.2 per cent in the first quarter.

But, for the rest of year, analysts say US economic activity is likely to flag, with growth falling to between 1.9 and 2.4 per cent.

The Fed committee meets next on August 20th, by which time it, will have in hand official second quarter growth figures, due out on August 1st, as well as two more employment reports.

The Federal Reserve pays close, attention to the job reports, fearing that high employment will trigger wage driven inflation. The US unemployment rate, 5.6 per" cent of the labour force, is at its lowest level for decades. But as worker productivity has also improved, inflation has remained in check.

If signs of a second half slowdown increase between now and the August meeting, the committee may again take no action on interest rates, according to several experts.