US interest rates seen as steady in near term

Here is a great piece on interest rates from the Financial Times. The US Federal Reserve will probably not have to raise interest rates in the first half of next year, senior officials believe, despite the brisker than expected start to recovery now under way. Wednesday’s beige book survey showed that the regional Fed districts saw the economy stabilize in July and August, with half seeing “signs of improvement”. Senior officials forecast decent growth in the second half of this year.

But these officials doubt that early momentum will continue to build, even though they are confident the US will avoid a double-dip recession. They think growth will be slightly above trend next year, which would still leave unemployment about 9 per cent at the close of 2010.

They think the downward pressure of spare capacity on inflation will be apparent with the underlying inflation rate slowly moving down to about 1 per cent or slightly less, with the low point coming possibly as late as 2011.

If the economy evolves in line with this forecast it would not be necessary to raise rates in the first half of 2010, unless something strange happened to inflation expectations – possibly in conjunction with adverse movements in commodity prices and the dollar.

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