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November 5, 2009    

Fed leaves interest rates at record low

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by Kay Murchie
Fed leaves interest rates at record low

US Central Bank, the Federal Reserve, has opted to keep interest rates at the record low of close to zero and hinted that they would stay this way for the short-term at least.

Despite signs of an improvement within the world’s largest economy, the Fed said that low inflation and high levels of unemployment were “likely to warrant exceptionally low levels of the federal funds rate for an extended period”.

However, according to economists, the phrase “extended period” suggests that the central bank believes the economic recovery remains fragile.

Last week, official figures revealed that the US economy expanded at an annualised rate of 3.5% between the July and September period, suggesting that the economy has exited its worst recession in 70 years.

The growth pace in GDP exceeded expectations, with many expecting growth of 3%. The US economy last experienced growth in the second quarter of 2008, when it grew 2.4%.

There has been some positive economic data within the US over the last week. The National Association of Realtors (NAR) said its Pending Home Sales Index rose to 110.1 in September - its eight consecutive monthly rise.

The index now stands at the highest level since December 2006 when it was 112.8. The index is 21.2% higher than September last year when it was at the 90.9 mark and the annual gain is the largest on record.

Furthermore, the Institute for Supply Management said its factory index jumped to 55.7% in October from 52.6% in September - any figure above the 50 mark represents growth in the sector.

Meanwhile, the decision from the US came just a few days after Australia, which is one of the few developed economies not to have fallen into recession like its counterparts throughout the world, increased interest rates from 3.25% to 3.5%.

It is the second month in a row that interest rates have increased and the move was not unexpected.

Across the Atlantic, the Bank of England will announce its decision at midday today and economists expect interest rates to stay at the historic low of 0.5%.

Last month, official figures revealed that the UK economy shrank by 0.4% in the July to September period and had not emerged from recession as expected.

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