The Federal Reserve met overnight and left interest rates steady after its two day meeting in Washington.
Despite the improving US economic outlook, the reality remains that apart from cheap money, low interest rates and heavy government spending, there’s nothing there to power the economy.
As a result, the Fed kept its federal funds rate, an overnight lending rate that guides rates on various consumer and business loans, in a range of 0% to 0.25%.
Rates have been at that level since December.
Inflation is not a threat, no matter what the debt alarmists think and US market interest rates have been roughly steady now since the early northern summer.
Ten year bond yields were around 3.47% overnight and not showing any reaction to the rising deficit, the soaring US debt, or jitters among investors worried about the flood of liquidity.
They dipped to 3.41% after the Fed’s announcement and statement.
Surprisingly, US stockmarkets fell in the wake of the Fed announcement, despite the comments on the recovery. The Dow finished down 0.8%, the S&P 500, 1%.
The US central bank had made it clear in previous statements that it is prepared to leave interest rates at this level for an "extended period of time", which is usually interpreted as ‘come and see us in a year’s time and we’ll let you know’.
"Economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased," the Fed said in a statement.
"Conditions in financial markets have improved further, and activity in the housing sector has increased."
"Household spending seems to be stabilising, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit."
It said consumer spending is stabilizing, but that rampant job loss and tight credit has restrained overall household consumption.
The Fed added that although the housing sector has begun to make a comeback, home sales and new home construction are coming off of historic lows.
Fed Chairman Ben Bernanke said earlier this month that the worst US recession since the Great Depression was "very likely" over, but that the recovery would be slow and would take time to create new jobs.
That is a statement he has made before with various qualifiers, but part of the message has been the consistent mantra that the recovery won’t feel like one with unemployment remaining high.
Consumer confidence might be high, but retail sales remain weak, consumer credit remains depressed, even after the cash for clunkers new car scheme, and some economists are wondering what happens after the current stocks rebuild (which will be modest anyway), finishes because there’s not much in the way of new demand on the horizon.
So, since the last Fed meeting around August 12, US retail sales have risen (thanks mostly to the cash for clunkers scheme and back to school spending), the index of leading economic indicators has picked up and unemployment has eased a bit in that the heavy toll of job losses seems to be passing..
Surveys of manufacturing in and around the east coast and Midwest are showing some small steadying and lift in activity.
Housing has been mixed, suggesting some stability in the hard-hit sector but no revival.
Housing starts and permits for future building hit their highest level since November.
The data reflected a rebound in multifamily home-building activity, but single-family starts, the main area of building, fell 3%.
Home prices seem to have started rising, but that is being influenced by foreclosure sales. Foreclosures continue to rise to record levels, pointing to further pressure on consumers in coming months.
Many economists generally agree an economic recovery is underway, but they question its sustainability given its current reliance on monetary and fiscal stimulus measures.
Consumer price growth remains weak, just 1.4% in the year to August, the lowest for four years. producer prices are even weaker, down in negative territory, although that will change in coming months as the comparison strips out the stronger price months and rolls onto months where prices started falling as oil prices plunged.
The Group of 20 nations meeting in the US tonight and tomorrow night won’t expect any change in policy approach from the Fed.
Certainly its support measures won’t change, such as the commercial paper support program, or its mortgage-related securities purchases.
They could come later in the year. The support for money market funds ended last week with a whimper.
Central banks and the G-20 finance ministers, not to mention the IMF, OECD, World Bank and Asian Development Bank, all say that now isn’t the time to end the stimulus packages and other measures, such as record low interest rates.
That will come gradually in the US, Europe and other countries in coming months, but not quite yet.
