labels: investment - general
No surprises as US Fed holds rates steady news
21 September 2006

The Federal Open Market Committee (FOMC) of the US Federal Reserve, which decides on key US interest rates, decided to maintain its target federal funds rate at 5.25 per cent at its meeting yesterday. The Fed was widely expected to hold the rates and the stock markets have responded positively. US treasuries were mostly unchanged as there were no surprises in the Fed decision.

An unexpected decline in producer price, or wholesale price, inflation and evidence of further slowdown in the real estate market in the US were enough to prompt the Fed to wait further before deciding on the next policy move.

The Fed continues to believe that the US economy is not headed for a sharp drop in growth rates, as feared by some, and the slowdown would be moderate and orderly. "The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market", the statement released by the Fed said.

The Fed has taken note of the reduction in crude oil and other commodity prices. "Inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand", the statement said.

But it is not yet time to drop the guard on inflation as "the high levels of resource utilisation and of the prices of energy and other commodities have the potential to sustain inflation pressures" and "the Committee judges that some inflation risks remain".

The Fed continues to keep its policy options open and the statement repeats what the previous statement said on future interest rate actions by the Fed. "The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information", the statement added.


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No surprises as US Fed holds rates steady