Publication Date : Friday 31 October 2014 11:30
US economy still fragile despite ongoing recovery
The US Federal Reserve's announcement to end asset purchase program and keep federal funds rate at near-zero signals that the US economy is recovering, but remains vulnerable, experts told RIA Novosti.
“The US economy is indeed recovering…However, the low federal funds rate is a recognition that the recovery is fragile and rates need to be kept low until the recovery is stronger,” Professor Mark Klock from the George Washington University’s School of Business (GWUSB) told RIA Novosti.
Former deputy director of the International Monetary Fund’s Policy Development and Review Department Desmond Lachman shares the same view point.
“The Federal Reserve’s decision to keep interest rates at close to zero indicates that the Fed believes that the US economic recovery is not yet strong enough for the Fed to begin normalizing interest rates at this stage,” Professor Lachman told RIA Novosti.
Professor Klock from GWUSB explained that possible inflation might be threatening the stability of the US economy, which echoes the Federal Reserve Thursday’s statement that the likelihood of the positive inflation forecast is diminishing.
Professor Lachman said that the question of major concern now is how soon the Federal Reserve will start to raise interest rates.
“The Fed seems to be indicating that it expects that by midyear next year the economy will be strong enough for it to start raising interest rates, and that there is a possibility that the Fed might start raising interest rates even sooner if the recovery proves stronger than the Fed currently expects,” Professor Lachman concluded.
On Wednesday, the US Federal Reserve announced its decision to conclude the bond purchase program that boosted American economy for six years, amid labor market improvement and household spending raise.
At the same time, the Federal Reserve decided to keep the federal funds rate at 0-0.25 percent. The near-zero rate was first established in the end of 2008 amid the onset of the global financial crisis, compared to 4.25-5.25 percent rate in 2007-2006.
The global financial crisis began in late 2007 in the United States with housing and credit bubbles and affected financial institutions all over the world.