Business News - Economic Outlook: Fed plays party pooper

ArcaMax Publishing > Business News

Your email address is safe with us. View our Privacy policy.

Free Financial Tools:

Start planning your financial future with our free financial tools & calculators.

The Funnies:

Get free jokes, comics, and more! See them all on
our funnies page

Weather:

Accurate national, regional, and local forecasts on the weather page

Economic Outlook: Fed plays party pooper

U.S. investors appeared unappreciative of the Federal Reserve's prudent policy approach this week, with stocks tumbling after an interest rate announcement.

It was likely the decision had little to do with it. The Fed Open Market Committee agreed to keep lending rates at a historically low zero to 0.25 percent.

In theory, banks, businesses and consumers enjoy low interest rates. But the Fed's decision makers couched their generosity with a statement that was less-than-glowing about the state of the U.S. recovery, which pulled out of a recession in the third quarter with a 3.5 percent gain in the gross domestic product.

The Fed didn't say, "don't be fooled." It just said there was a long way to go. In the macroprudential vernacular, the Fed said, "economic activity is likely to remain weak for a time," suggesting it would continue to keep rates low for "an extended period."

The housing market "appears to be expanding," the Fed said, "but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit."

The Fed said it would monitor unemployment and the inflation rate, which "will remain subdued for some time." The average forecast for the unemployment rate, currently at 9.8 percent, is an expectations the rate will top 10 percent next year, a less-than-glowing indication that consumer spending will remain weak for some time.

The move puts Australia's central bank another month out of sync with major reserve banks around the globe, as Australia, which avoided the recession, raised their rates for the second time in two months last week. The U.S. bank, essentially, didn't take the bait. "The one consistent theme with all the Fed speakers is that they're not going to raise rates any time soon," Drew Matus, a senior economist at Bank of America-Merrill Lynch, told The New York Times. "That is the one consistent theme that gets hammered home time and again," he said.

In Washington, a key financial adviser, Sen. Christopher Dodd, chairman of the Senate Finance Committee, is forging a financial reform bill vastly different from a bill written by his counterpart in the House, The Wall Street Journal reported.

Rep. Barney Frank with help from the Treasury Department unveiled a reform bill last week that relies on an inter-agency council to monitor risk at companies so large their failure would ripple through the entire financial system.

Similarities with Dodd's approach may end right there. Dodd's bill would take supervisory power away from the Fed and the Federal Deposit Insurance Corp. to create a new agency charged with bank and bank holding company oversight.

U.S. markets turned sharply lower Wednesday afternoon after the Fed announcement, but held onto tentative gains. On Thursday in Japan, the Nikkei 225 index lost 1.29 percent, while the Shanghai composite in China gained 0.85 percent. The Hang Seng index in Hong Kong dropped 0.63 percent, while the Sensex in India rose 0.95 percent.

The S&P/ASX in Australia lost 0.71 percent.

In midday trading in Europe, the FTSE 100 index in Britain fell 0.59 percent. The DAX 30 in Germany lost 0.43 percent. In France, the CAC 40 also dropped 0.43 percent, while the pan-European DJ Stoxx 50 slid 0.8 percent.

Copyright 2009 by United Press International

This news arrived on: 11/05/2009

Share this Story