Federal Reserve likely to leave rates steady in August

At a testimony to the Senate Banking Committee, Federal Reserve Chairman Dr Alan Greenspan said that “it is clear, for the time being at least, the increased in spending on consumer goods and houses has come down several notches, albeit from very high levels.” This comment suggests that the Federal Reserve is likely to leave rates steady in August.

Economists are divided by what the Federal Reserve will do with interest rates. Some economists are concerned that retail sales rose more than forecasted in June. Some economists are concerned about CPI figures – following in the wake of stronger than expected retail sale figures. Others are concerned by the 0.1 per cent increase in real earnings for American workers.

Prior to comments by Alan Greenspan that the US economy was slowing, the Aussie Dollar slid to a six week low of US57.55c, renewing fears that the Reserve Bank of Australia may have to increase interest rates to guard against inflation.

The inflation rate is a major concern for the RBA. The surge in petrol prices and the introduction of GST is likely to increase the inflation rate which is likely to exceed 7 per cent on an annual basis in the September quarter, putting pressure on the RBA to move rates to combat inflation.

The Aussie dollar recovered after the comments by Alan Greenspan, at 0630 AEST, the Australian dollar was at US58.36 cents from US57.73 cents at the close of yesterday.