May 1, 2008 | posted by Michael Baxter in US economy |

Down went US interest rates yesterday. This time they were lowered by 0.25 per cent, to 2 per cent – but now markets are concluding that is the end of it.  Not so long ago they were predicting US rates would eventually fall to 1 per cent, now markets are pricing-in rises in US interest rates later in the year.

The Fed is worried about inflation – two members of its rate setting committee voted against the cut.

This time the Fed changed its tone.  It removed the words the “downside risks to growth remain” and added “uncertainty about the inflation outlook remains high.”

So that’s it then.  The Fed reckons the risks to growth are receding, and that inflation is returning. 

But many disagree.  Capital Economics, for example, said, “However, the surge in energy prices since the start of the year (and many other commodity prices as well) looks more and more like an unsustainable bubble. We suspect that prices will fall back soon easing near-term inflationary pressures and leading to a drop back in inflation expectations as well. That would allow the Fed a free hand to respond to signs of further distress in the real economy.”

But the US rate of interest is now a full two percentage points lower than the euro rate.  No wonder the dollar has fallen so far.

This is hitting the Eurozone economy – with Airbus, for example, forced to announce yesterday it was upping its prices.

The truth is, the falling dollar is, along with other things forcing the dollar down, proving a strain on the global economy.