US Federal Reserve Maintains Interest Rate Policy

By: Dr. Mike Campbell

The Federal Reserve board has decided to maintain its near zero interest rate policy for the time being and has indicated that the policy is likely to remain in force for the foreseeable future. The policy has seen rates held between 0 and 0.25% since December 2008. The logic behind low interest rates is that it provides a mechanism for businesses to have access to cheap loans, preventing some firms from going under and allowing others to expand. The hope is that by increasing the money supply, America will be better able to take advantage of the elusive recovery when it finally kicks in. At the moment, US inflation is not giving any cause for concern, so rates will not need to be increased to keep it in check.

The board noted that consumer spending had increased but noted that banks were reluctant to lend and that unemployment remained high. They also claimed that there was an improvement in the housing market.

The Federal Reserve’s comments on the housing situation are in contrast with figures for new home sales which have fallen to a new record low. Data released for May show that the number of new home sales fell by a third over the April figure; a fact attributed to the ending of certain tax credits. New home sales dipped to an annualised rate of 300 000, but sales of the existing housing stock showed a much smaller decline. The new homes sales figure is the lowest since records began in 1963. It underlines the fact that people are less willing to take on substantial new debt whilst job security fears are still a real issue in America.