May 2004 Financial News

Investors await US rate decision

May 04, 2004

Financial markets worldwide are braced for a statement from the US central bank which could signal that interest rates will rise this summer.
The Federal Reserve, which announces its monthly rates decision later on Tuesday, is tipped to leave them on hold at a 46-year low of 1% for now.

But its accompanying statement is thought likely to hint that rates will rise soon to match accelerating growth.

That would mark a policy shift for the Fed, which last raised rates in 2000.

The central bank has cut borrowing costs 13 times in the last three years in an effort to offset the impact of a global economic downturn, and the threat of terrorist attacks.

Job prospects

But analysts believe recent data pointing to strong economic growth and a big rise in recruitment by US companies will prompt the Fed to change its stance.

"One of the major reasons why the Fed I think is getting ready to raise rates this summer is that the job picture has improved in the US," Maury Harris, chief economist at UBS Securities, told the BBC's World Business Report.

"There are many indicators that the job market is moving forward, and history shows that the Fed doesn't wait for full employment before they start raising rates."

Last month, figures highlighting a sharp increase in the number of new jobs created in March helped restore confidence in the US recovery.

Until then, persistently sluggish rates of new job creation had fuelled fears that worsening employment prospects could dent consumer spending, depriving the economy of one of its main growth drivers.

Fed chairman Alan Greenspan appeared to pave the way for higher borrowing costs two weeks ago, when he told the US Congress that rates would have to rise "at some point" in order to choke off inflation.

However, he added that inflation did not yet pose a threat.

An increase in interest rates could curb stock market gains and weigh on spending by heavily-indebted US consumers in the run up to the November presidential elections.

Source: BBC World