Fed Interest Rate Decision: Will the Fed indicate a rate hike?
After the European Central Bank and the Bank of England kept interest rates unchanged, focus now shifts to the Fed Interest Rate Meeting on the 15th of March at 18:15GMT.
The Fed is expected to keep the country’s interest rates unchanged at 0.25%. Slow growth, high unemployment, a weak housing market and tight credit are the main issues faced by the Federal Reserve today. In order to boost economic growth, policymakers are following an ultra-loose monetary policy. Rates are kept near low levels with the Fed maintaining its second round of Quantitative Easing. The Fed expects that low rates will lead people and businesses to borrow money more easily. This will, in turn, help businesses grow and more jobs will be created. Consumers will spend more money helping areas such as the housing and the retail sector. As a result, the Fed believes that keeping interest rates low will help boost a self sustainable recovery.
Up to this point, Federal Reserve officials appeared reluctant to remove their economic stimulus and abandon the Quantitative Easing program. But for how long will interest rates remain at such low levels? Solid economic data builds confidence that the US economic recovery is strengthening. The country’s Labor sector has shown significant signs of improvement. The country’s unemployment rate also showed a significant decline to 8.9% down from November’s 9.8% rate. Consumer spending is rising at a fast pace and fourth quarter GDP showed an acceleration of the US growth pace. Economists expect the US economy to average a 3.5% GDP in 2011 and more jobs to be created in the following months. There is little doubt that the US economy has entered a self sustainable phase and economists expect interest rates to be lifted before the end of this year.
As economic data turns positive the threat of deflation for the US begins to fade. US Consumer Price Index significantly increased in recent months gaining 0.4% in December, 0.4% in January and a 2% gain is expected for February. Investors are taking in to account the Fed’s view on recent oil prices and whether significant upward inflation pressures have been created.
Recent developments in the world do not seem promising for the global recovery. Oil prices jumped to dangerously high levels while consumers struggle with tight austerity measures and cuts in government spending. Unrest in the Arab countries continue to spread to more countries such as Saudi Arabia, pushing oil prices even higher and possibly choking the global recovery. To make matters worse, a massive earthquake has hit Japan creating a further challenge to the already vulnerable global recovery. These issues will undoubtedly affect the Fed officials as they decide on the next US monetary move.
Investors’ real focus now will be on the release of the accompanying FOMC statement, where comments on the US recovery and inflation will be made. Any hawkish statements may push the dollar higher at fresh highs. Whatever the outcome, trading in the currency markets is promised to be adventurous and exciting!
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