August 30, 2006 | posted by Michael Baxter in Uncategorized |

As ever the latest news from the US is, on the face of it, contradictory. According to the minutes of the Fed meeting held earlier this month when it chose to keep rates on hold, the decisions was a close call, and one member voted for another hike. In fact, the Fed’s interest rate setting committee agreed that the decision to keep rates on hold “did not necessarily mark the end of the tightening cycle”.

With a growing body of economic opinion warning that the US economic machine is about to go though a severe slowdown, with some even warning of a possible recession next year, many had felt that the Fed’s decision to leave rates unchanged marked the end of the era of rising rates. Capital Economics, for example, reckons rates will fall back to 3.5 percent next year, from the current 5.25 percent level.

But the minutes, which were released yesterday, have thrown analysts into confusion. And no one seems quite sure whether the next meeting will see another stick, or whether the Fed will raise the stakes another quarter of a percent.

The US rate of interest had risen for 17 successive meetings. But has too much heat been taken out of the economy already? The latest data from the US Conference Board got many analysts spooked. The Conference Board has the US Consumer Confidence Index falling to just 99.6, from 107 last month, and the lowest level for seven months. If things are this bad, they argue, why is the Fed still considering upping rates?

But actually the Consumer Confidence index is not performing that badly. It was much lower last Autumn, for example, and the Fed still chose to up rates.

The real problem is the threat posed by inflation. That the Consumer Confidence Index has fallen to a seven month low is hardly a sign of an economy which is seeing pressure come off the inflation pedal completely. For the Fed to conclude the time for a rate fall is upon us, the index will probably need to fall a good deal further. So, we will have to wait another month to see if things get any clearer.

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