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US FED Reserve rate announcement- to remain at zero for longer

Written by Andrew Isbister on August 10th, 2011.      0 comments

This morning the US Federal Reserve (FED) announced their interest rate decision and provided their accompanying statement. The statement is their primary tool to communicate with investors about monetary policy. Given the events of the last few days, this announcement was of course a focus for the markets.
Whilst no change was expected to the FED funds rate which remains at zero, their statement did provide some clarity as to their current thinking, in light of recent events. They stated “economic conditions - including low rates of resource utilization and a subdued outlook for inflation over the medium run - are likely to warrant exceptionally low levels for the FED funds rate at least through mid-2013”
This has been described as an exceptional step, in terms of providing to the market a firmer commitment to holding the rate at current levels.  They also stated that growth so far this year has been considerably slower than they had anticipated, with a smaller rebound in the second half of this year now being predicted, as opposed to the strength of rebound they had suggested at their last meeting.
These comments with regards to the economy were of course fully expected, given the overall weak data flow of late, and the events of the last week. They have left the option of a further round of stimulus firmly on the table, possibly by instigating a third round of quantitative easing (the electronic printing of money).