Wednesday, 25 January 2012

The US Federal Reserve Sends a Message

The US economy was so hopelessly weak, wealth destruction was so widespread and job losses so acute that the Fed cut official interest rates to zero. 

That was back in December 2008, more than 3 years ago.

Since then, the economy has been so dreadfully moribund, its banks effectively insolvent, job creation so sluggish, that the Federal Reserve has kept the exceptionally low (zero %) interest rate settings in place. 

Sure, there have been some less bad data in recent times, but the economy is performing like a gambler making $2 a spin, having lost $1 million in the last three years.  An improvement; yes – but healthy?  A resounding no.  There's a long way to go and many risks before anyone, including the Fed, can be sure the losses of the Crisis have been recouped.

This morning, Canberra time, the Federal Reserve released a statement where it said that it plans to keep interest rates near zero until the end of 2014. This adds 18 months to its previous plans and reflects its fear about the outlook.  The problems confronting the economy, employers, home owners and the administration as it tackles a sky-rocketing sovereign debt crisis are huge.  Zero interest rates are needed to turn these negatives around.

There can only be one conclusion from the latest Fed statement and that is the US economy will remain mired in a deep funk for many years.

The RBA would be wise to take this news into account as it drafts the Board Papers for the 7 February Board meeting.  With local inflation well under control, jobs being shed at a disconcerting rate and GDP growth muddling along, an interest rate cut is the only logical conclusion.   

No comments:

Post a Comment