Forex Blog: Currency Trading News & Analysis.

April 22nd 2005

Fed won’t respond to global imbalances

In a recent interview, a member of the Federal Reserve Bank stated that the Fed will not respond to widening global imbalances. The US government has been running large fiscal deficits the last few years, and issued short and long-term
bonds to finance the spending. Because the government must service the debt by making periodic interest payments to bondholders, it is in their best interest
that interest rates remain low. The Fed, apparently, is unwilling to take this into consideration when conducting monetary policy. Instead, it has pledged to predicate monetary policy on inflation forecasts. It should also set interest rates to facilitate the correct pricing of assets. Many fear, for example, that cheap access to credit has led to bubbles in  many sectors of the economy, including real estate and some commodities. Reuters reports:

Despite the steady pace of interest rate hikes since last June, the Fed has further to go before the federal funds rate reaches a neutral level where it has no impact of inflation and growth. The Fed is likely to raise rates further at a measured pace ‘if growth is sustained and inflation remains contained.’

Read More: Global imbalances can’t tie Fed’s hands

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Posted by Adam Kritzer | in US Dollar | No Comments »

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