Keeping US rates low

Investment markets have reacted positively this morning to news that the Federal Reserve (“the Fed”) will keep interest rates in the US low until mid-2013.

It could be that this announcement on US interest rates is enough to halt days of market declines.

The announcement resulted in US shares having their best day of performance in two years, with the Dow Jones index closing up 4%.

The announcement from the Fed explained that sluggish economic growth in the US was “likely to warrant exceptionally low levels for the federal funds rate at least until mid-2013”.

As well as providing positive news for markets, the announcement did highlight the bleak outlook for the US economy.

By referring to weaker than expected economic growth, depressed housing prices, low levels of consumer spending and high unemployment levels, the Fed has highlighted many of the problems facing the US economy over the next three to five years.

Rather than giving cause for the markets to rise strongly, these factors are more likely to halt declines. The markets will still be looking for the positive news they need to push back into higher territory.

Markets will have to wait until the Fed holds its annual research meeting at Jackson Hole later this month before deciding on the real outlook for the US economy.

With interest rates in the US already low at between 0% and 0.25%, news that they will remain low will not stimulate markets but it will remove a degree of fear, allowing investors to recognise value in oversold investment markets.

Photo credit: Flickr/Ken_Mayer