Wednesday, 8 August 2007

Fed sits tight, RBA chooses to hike

The Federal Reserve left interest rates unchanged yesterday. MarketWatch reports:

The Federal Open Market Committee voted unanimously on Tuesday to sit tight on interest rates and keep its focus on inflation, but at the same time acknowledged there were downside risks from the recent turmoil in financial markets.

"Although the downside risks to growth have increased somewhat, the FOMC's predominant policy concern remains the risk that inflation will fail to moderate as expected," the FOMC said in a statement following the meeting behind closed doors. Read full FOMC statement

As expected, the central bank chose to hold its target for the key federal funds interest rate at 5.25% for the ninth straight meeting.

The Fed said that it still expects moderate growth in coming months, despite volatile financial markets, tighter credit conditions and the ongoing correction in the housing market.

The Fed would have noted the fact that credit is not exactly drying up for the consumer. From MarketWatch:

An increase in credit-card debt pushed outstanding U.S. consumer debt up at a 6.5% annual rate, or $13.2 billion, to $2.46 trillion in June, the Federal Reserve said Tuesday.

And yesterday provided yet another reason for the Fed to stay concerned about inflation: productivity growth is slowing. Again from MarketWatch:

The latest figures on output in the U.S. workplace show a mix of slower productivity growth and upward pressures on wages, painting an unpleasant picture for the Federal Reserve.

Workplace productivity increased at a 1.8% annualized rate in the second quarter, while unit labor costs...increased 2.1% in the nonfarm business sector, the Labor Department said Tuesday...

In the past four quarters, productivity in the nonfarm sector has increased a weak 0.6%, the government's data showed. Over the same span, unit labor costs are up 4.5% -- the fastest pace since the third quarter of 2000.

But while the debate in the US has been mainly about a cut in interest rates, other central banks are still raising rates. The latest is the Reserve Bank of Australia today. Bloomberg reports:

Australia's central bank raised its benchmark interest rate a quarter point to the highest in almost 11 years. The increase may undermine Prime Minister John Howard's campaign to win a fifth term in office this year.

Governor Glenn Stevens raised the overnight cash rate target to 6.5 percent today in Sydney, the first adjustment since November, to curb an inflation rate running faster than he forecast and cool the biggest surge in lending since 1989. The nation's currency rose.

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