Economic Outlook: Keeping rates intact

By ANTHONY HALL, United Press International   |   May 3, 2012 at 10:59 AM
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The European Central Bank said it would keep its overnight lending rate at 1 percent, the most commonly expected choice out of three.

That doesn't mean the ECB's lending rate is doing nothing, however.

Central banks slashed interest rates in a series of desperate measures to stimulate the economies within their jurisdiction as the financial crisis began to unfold. The U.S. Federal Reserve cut its rate to zero to 0.25 percent, the lowest in its history. The Bank of England cut its rate to 0.5 percent. The ECB managed to keep its rate at 1 percent before surprising at least a few bankers and economists with a burst of surreal confidence in 2011, which pushed policy makers to raise the rate by 25 basis points twice, until it hit 1.5 percent.

This turned out to be a premature bet. It also proved that doing nothing is not quite what the ECB was up to. In so many words, keeping rates intact is choosing to do nothing. That's not the same thing.

There are two goals the Fed in Washington is expected to keep in mind. The first is inflation.

With inflation in check lately, it is hard to recall how devastating rising prices can be, but consider the point that about 70 percent of the U.S. gross domestic product is made up by consumer spending. That means, while inflation in developing countries can be literally a killer if food prices rise too quickly, in the United States, untold thousands are tossed under the bus when core prices begin to rise.

Not only does inflation provoke layoffs, but those with marginal incomes are, in effect, pushed under the poverty line if prices increases accelerate.

This is all the more vivid if one considers that it takes time for the federal government to change thresholds for social services.

The Fed's other goal is to adjust monetary policy to keep jobs secure and even to create jobs if that is possible.

For the Fed, layoffs are the ultimate defeat. Cutting the federal fund rate to zero to 0.25 percent and buying billions of dollars of securities to keep interest rates low long term, then watching layoffs continue is to view, essentially, companies slapping the Fed across the face.

However, the Fed's role in the United States is magnified considerably by a dynamic in Washington known as gridlock.

Some politicians gripe that the Fed has too much power, but they only hand more power away by their legislative equivalent of doing nothing, which looks admittedly like hard work, but does not help anyway.

In international markets Thursday, the Nikkei 225 index in Japan added 0.31 percent, while the Shanghai composite index in China gained 0.07 percent. The Hang Seng index in Hong Kong fell 0.28 percent, while the Sensex in India fell 0.87 percent.

The S&P/ASX 200 in Australia shed 0.16 percent.

In midday trading in Europe, the FTSE 100 index in Britain gained 0.51 percent, while the DAX 30 in Germany rose 0.32 percent. The CAC 40 in France added 0.59 percent, while the Stoxx Europe 600 added 0.4 percent.

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