Fed holds US interest rates despite diminished economic risks

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The US Federal Reserve has announced it will maintain interest rates between 0.25 an 0.50 per cent, as its says short-term risks to the economy had diminished, but that inflation was still below its target.

Esther George was the only member of the FOMC who voted to raise rates.

A statement by the Federal Open Market Committee blames low energy prices for the drag on inflation.

The group also says household spending was growing and that unemployment had fallen for the last two months.

Investors are divided on whether the Fed will raise rates before the US presidential election.

David Kelly, chief market strategist, JP Morgan Asset Management says there is a “small window” for a September rate rise.

However, David Buckle, head of quantitative research at Fidelity International anticipates a “Christmas raise” – as long as the dollar doesn’t rise and there is a small rise in inflation.

Buckle argues there are too many risks to the global economy for a September rate rise, while the November meeting will be six days before the US election.

Commenting on this week’s decision, Kelly says: “Near-zero rates are incongruous with the Fed’s positive view of the economy. By maintaining a near-zero policy rate while economic growth is improving and the labor market is strengthening, the Fed faces the risk of eventual inflation or asset price bubbles.

“For now, inflation appears benign and equity valuations still look reasonable, suggesting moderate increases in both stock prices and long-term interest rates over the next few quarters.”