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News: US: Fed holds interest rate despite inflation

Wed, 06 Aug 08

The US Federal Reserve has kept its key interest rate unchanged this month, whilst the US economy is faces with the twin dangers of possible recession and high inflation.

Explaining the decision to keep the rate at 2%, policymakers said economic growth was likely to remain weak for some time while the outlook for inflation was 'uncertain'.

Consumer prices rose at their fastest monthly rate in 11 years in June but oil prices are currently falling.

The Fed cut rates aggressively in late 2007, but has frozen them since April.

'Tight credit'

The Fed's rate setting committee voted 10 to one to keep rates where they are, with Richard Fisher dissenting in favour of a rate hike.

Experts say uncertainty over how severe and prolonged the economic slowdown will be is making the Fed cautious about any shift in policy.

The continued slump in the housing market and its impact on consumer confidence has made any imminent rate rise unlikely despite signs of increasing inflationary pressures.

In a statement, the central bank said 'tight credit conditions, the ongoing housing contraction and elevated energy prices are likely to weigh on economic growth over the next few quarters'.

In addition, it warned that 'inflation has been high and some indicators of inflation expectations have been elevated'.

Economic uncertainty

Data published on Tuesday showed that the services sector contracted again in June but not by as much as experts had forecast.

Second-quarter gross domestic product (GDP) growth was a stronger-than-expected 1.9%, on an annual basis, although this was aided by government stimulus measures.

Unemployment, meanwhile, has risen to a four-year high while consumer spending is weak, rising only 0.2% in June.

Some analysts believe the Fed will adopt a 'wait and see' stance as long as the economic outlook does not deteriorate markedly.

'My view has been all along and it remains that the Fed is going to be on hold for a good deal of time,' said Deutsche Bank's Josh Feinman.

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