US economy: Fed decides to keep rates on hold

23rd June 2011

The slowness and weakness of the US economic recovery has also led the Federal Reserve to hint at further quantitative easing.

The decision to keep rates on hold came after a two-day meeting of the Federal Open Market Committee, which sets US interest rates.

The Guardian reports the FOMC's statement.

"The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan."

The Guardian also reports on speculation that Federal Reserve chairman Ben Bernanke may seek to embark on a further round of quantitative easing.

It says: "For the past eight months the Fed has been engaged in a second attempt to stimulate the economy using quantitative easing – buying government bonds in an attempt to hold down interest rates and encourage borrowing. The controversial $600bn programme, known as QE2, ends this month."

Philip Poole, global head of macro and investment strategy at HSBC Global Asset Management, says investors in US stocks need to remain vigilant.

He says there was evidence lack of will on the part of US politicians to get to grips with its debt problem.

"In effect the US has been in denial and according to S&P the risk is that it stays there until after national elections in 2012; in which case the coveted AAA rating could be consigned to history.

"The result is that, rather than falling, the US fiscal deficit will remain at an unhealthy 11% of GDP this year (IMF forecast.) Moreover, the fiscal implications of an ageing population add a structural component to the longer-term challenge of reining in the deficit.

"Ageing will increase dependency ratios, pushing up the cost of entitlement programmes and eroding the tax base as the proportion of workers falls. And this will happen quite quickly. The ratio of the population over retirement age to those of working age will increase by 5 percentage points in the next ten years. "

To receive our free weekly email sign up here.      

Leave a Reply

Your email address will not be published. Required fields are marked *