Why The Us Rate Freeze May Be Short-lived

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After 17 interest rate hikes over a period of 25 months, the US Federal Reserve has finally ended its tightening campaign - at least, for the moment.

The key US interest rate will remain at 5.25% for at least another six weeks or so until the Fed’s next meeting on September 20th.

But the 10-strong Federal Open Market Committee kept its options open - in an accompanying statement, the FOMC said “any further tightening would depend on economic data,” said Marketwatch.

So is this the end of the rate hikes - or just a temporary pause?

The message given by the Fed’s decision to keep the key US interest rate at 5.25% was by no means clear. One member of the FOMC even voted to raise rates.

That might not sound like a big deal to us here in the UK, who are used to rebellion in the ranks of our own Bank of England. But Fed votes are generally unanimous, and the dissenting voice is the first since Ben Bernanke took over as Fed chairman earlier this year.

So in turn, market reaction was muted. Most Wall Street commentators had expected a pause, but uncertainty will continue to hang over investors ahead of further meetings later this year.

It’s not surprising that the Fed is keeping its options open. There are plenty of good reasons to be worried about the US economy. On the one hand, the housing market is cooling sharply. The ‘wealth effect’ of continuously rising property prices is the main thing that has been propping up US consumer spending.

Higher interest rates will hurt borrowers - particularly those who have bought homes using one of the many types of interest-only mortgages which have grown in popularity in the States as the housing bubble inflated.

Consumers are already tightening their belts in reaction to soaring oil prices which have pushed the cost of gasoline (petrol) to near-record levels. A further squeeze could see retail spending collapse - and with consumption accounting for nearly 70% of US economic growth, that would be disastrous for the US economy.

On the other hand, high oil prices may also be helping to drive up labour costs, which rose at an annualised rate of 4.2% in the second quarter. Wage inflation is every central bank’s worst nightmare. As long as companies absorb these costs without pushing them onto customers, rising wages can be contained until the economy eventually turns down again and the labour market becomes slacker. But if companies start charging consumers more, the consumers in turn demand higher wages to pay for more expensive goods and services, resulting in a vicious wage-price spiral.

So despite the freeze in rates this time round, it’s by no means certain what the Fed will do next month. And that means that equity markets are likely to remain jumpy for the foreseeable future.

Over on this side of the Atlantic, the big story was news that Charles Allen has finally bit the bullet and resigned as chief executive of struggling broadcaster ITV. Still, he doesn’t go away empty-handed, as the compere of one of the channel’s many game shows might say. He walks away with nearly £2m compensation, and a £500,000 a year pension. Oh and he also has about £500,000 in share options.

Not bad going for someone who has managed to preside over a share price fall of 20% since he took over two and a half years ago, not to mention a 22% drop in advertising revenues in just the last year.

As the London Evening Standard’s Anthony Hilton puts it, there were two main problems blighting his tenure at ITV. The collapse in the advertising market was one problem - and “awful” programming was the other. “Viewers who sat through an episode of Love Island will wonder how anyone responsible for such rubbish could possibly be entitled to £2.5m - but might also think it worth paying that much to get it off the air.”

The two issues, clearly, are connected. If your programmes don’t make the grade, no one will watch them. And if no one’s watching, advertisers aren’t interested in buying your space. Which is why the main concern for any broadcaster has to be producing quality content.

Mind you, looking at Mr Allen’s CV might have given investors a clue as to how things would turn out. At Granada he “headed up the ill-fated On Digital, but survived the fallout when it finally folded in 2002.” The lasting legacy of On Digital was the hand-knitted monkey puppet used to advertise the service - and even that has since slipped into obscurity. Investors will be hoping that ITV won’t go the same way.