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Tuesday, 7 May, 2002, 18:25 GMT 19:25 UK
US rates left on hold
The US Federal Reserve building, Washington
The US Federal Reserve building, Washington
The US Federal Reserve has left interest rates unchanged at their current 40-year low of 1.75%, citing 'uncertain' growth prospects in the coming months.

The decision is in line with market expectations, with most analysts predicting that the Fed would postpone raising rates for now so as to let the US economic recovery gather momentum.

The US central bank last year cut interest rates by 4.75 percentage points in a bid to stave off recession.

But with the economy now showing signs of strengthening, the next move is expected to be upwards.

Mixed signals

In March, analysts forecast that the Fed would raise interest rates as early as May, citing evidence of a sharp expansion in US economic growth.

But most have revised their forecasts since then in the light of some patchy economic figures and a slew of cautious outlook reports from US blue-chip companies.

Two weeks ago, figures showed that the world's biggest economy expanded by a bullish 5.8% during the first three months of the year.

On Wednesday, fresh data showed that US business productivity - a key component of economic expansion - grew at an annual rate of 8.6% during the same period, its fastest increase since 1983.

False dawn

But economists have warned that the strong first-quarter economic expansion was artificially boosted by an increase in defence spending linked to the US military campaign in Afghanistan.

They added that business investment, a bellwether for future economic growth, has yet to pick up.

And last month, US unemployment jumped to an 8-year high of 6%, triggering fears of a slowdown in consumer spending.

Stock market relief

Meanwhile, most major US corporations last month reported a lacklustre performance for the January to March period.

They disappointed investors further by failing to confidently predict an upturn in sales later in the year.

The Dow Jones index of leading US shares, which had performed strongly during the first three months of the year, has struggled to stay above the key 10,000 level over the last two weeks.

The Fed's interest rate decision helped to support the markets on Tuesday.

The Dow and the Nasdaq index of technology shares were both in positive territory after the decision was announced.

Fed hints

Fed officials have hinted in recent weeks that a rate increase is not on the cards just yet.

Last month, Fed chairman Alan Greenspan told a congressional panel that the economic recovery could be undermined by a recent surge in oil prices.

His remarks were taken as a clear signal that rates are unlikely to rise until the economic recovery has gathered more momentum.

Other world central banks, such as the Bank of England and the European Central Bank, are waiting for the Fed to move before raising their own rates.

However, central banks in some smaller industrial counties, including Canada and Sweden, have already raised rates, and Australia followed suit on Wednesday.

 WATCH/LISTEN
 ON THIS STORY
Richard Dekaser, National City Corporation, Ohio
"They'd like to see a much more self-sustaining economic recovery underway before they start applying the brakes"
See also:

07 Mar 02 | Business
Greenspan upbeat on US recovery
30 Jan 02 | Business
US keeps interest rates unchanged
24 Jan 02 | Business
Fed chief: US is on the mend
11 Jan 02 | Business
US economy faces 'significant risks'
03 Jan 01 | Business Basics
Alan Greenspan: market mover
07 May 02 | Business
World slump in tech shares
17 Apr 02 | Business
Greenspan soothes rate hike fears
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