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brw daily ... us fed holds rates.

  1. rembrandt

    5,816 Posts.

    Hmmm ... BRW Daily.

    US Federal Reserve holds rates
    By Neil Shoebridge, managing editor
    Wednesday, December 11, 2002

    In a move that surprised no one, the United States Federal Reserve decided overnight to hold the federal funds rate - the interest that banks charge each other on overnight loans - at its current 41-year low of 1.25%. The Fed's thinking is simple: with the US economy still sluggish, rates need to remain low to encourage consumers and business to spend. Some economists thought it might cut rates at its December meeting, but it appears that chairman Alan Greenspan wants to hold that ace up his sleeve in case economic conditions deteriorate after Christmas.

    The Fed says that the low rates are "providing important ongoing support to economic activity ... [the] limited number of incoming economic indicators since the November meeting, taken together, are not inconsistent with the economy working its way through its current soft spot".

    The Fed surprised most economists by cutting rates 50 basis points at its November 5 meeting, hoping that the cut would boost the US economy. It is too early to know if its strategy is working, although US retailers are reporting brisk sales ahead of Christmas. Solid consumer spending has stopped the US economy from sliding back into recession this year - and US consumers appear to still be in the mood to spend. But over the past two months, forecasters at the National Association for Business Economics have cut their December quarter economic growth forecast from 2.7% to 1.4%. The US jobs market is depressed and equity markets remain erratic.

    Greenspan could cut rates to 1%, or less, if he wants, but some economists argue that further reductions would not have a dramatic impact on the US economy. "Traditional monetary policy is using open-market operations to affect the fed funds rates, which is the lever," former Federal Reserve governor Lawrence Meyer told CNN/Money recently. "If that lever is pushed all the way down ... there are things you can do."

    What type of things? CNN/Money says the Fed could take the following measures to boost the US economy:

    * Push short-term interest rates lower by buying short-term government bonds.
    * Buy corporate bonds to make corporate borrowing cheaper.
    * Talk about keeping money supply flowing, which would help keep interest rates low.
    * Relax the rules covering the amount of stock investors can buy on credit, or "margin".
    * Target a higher rate of inflation, so the cost of holding on to money will be greater than the cost of spending it.
    * Raise rates. Yes, raise them: CNN/Money says such a move "would help financial institutions and other debt-holders, and would also help the people who have money in interest-bearing accounts".

    "One thing to understand about interest rates is that they're bad in both directions," says Jim Bianco, president and research director of BiancoResearch.com. "Having rates at an extreme low is bad. By encouraging them to go further, the Fed only makes it worse."

    In Australia, rates are expected to remain steady at 4.75% until at least June next year. Last week, the governor of the Reserve Bank of Australia, Ian Macfarlane, told a parliamentary economics committee that he would like to lift rates from 4.75% to 5.5-6%, but there will be no immediate increases because of the effect of the drought and weak economic conditions in the US and Europe. Macfarlane predicts Australia's economic growth will rise from 3% in 2002-03 to 3.75% in the six months to December 31, 2003.

    This is only my view ... read the red stuff.

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