US rates expected to stay at 2%

[frigidmagi]

BBC

US interest rates are expected to remain at 2% amid further signs of problems in the housing market and falling consumer confidence.

Analysts suggest the Federal Reserve faces a difficult balancing act as it tries to cope with rising prices and a slowing economy.

US consumer confidence is reportedly at its lowest level in 16 years.

Meanwhile, a survey suggested house prices were substantially lower in April compared with a year earlier.

Higher oil prices, high commodity prices and higher fuel prices are causing an inflation headache for the Central Bank, according to the BBC's Michelle Fleury in New York.

Analysts suggest the next move in rates could be upwards in an attempt to tackle inflation.

But that could worsen the economic slowdown caused by crises in the credit and housing markets, economists suggest.

It is a situation that the head of the IMF recently described as being caught between "fire and ice".

Although no change in rates is expected on Wednesday, investors will watch closely for any accompanying statements from the Fed for an indication of what its future interest rate policy might be, our correspondent says.

Housing slump

In the housing market, property prices fell by their fastest rate since 2000, according to the Case-Schiller home price index released on Tuesday.

Prices in the 20 cities it monitors were 15.3% lower in April compared to the year before.

The narrower 10-city index was 16.3% down, its biggest decline in its more than two-decade history.

Las Vegas and Miami experienced falls of more than 25%, while the declines in Denver, Chicago and Cleveland were less severe than in the previous month.

Economic gloom

The latest reading of US consumer sentiment also showed a worsening situation.

Higher food and fuel prices and fears over the economy, jobs and wages mean that US consumers' expectations for the next six months are at an all-time low, according to the Conference Board which polls 5000 households monthly.

The percentage of consumers expecting business conditions to get worse over the next six months jumped to 33.9% in June from 32.9% the previous month.

And the percentage of those expecting fewer jobs to be created in the months ahead rose to 35.5% from 32.3%.

"They feel purchasing power is diminishing. They've got rising gas and food prices and they don't feel wages are keeping pace with it and that is really taking a bite out of consumer confidence," Lynn Franco from the Conference Board told BBC News.

[SirNitram]

Raising interest rates would promote saving. Therefore, this must never, ever be done.

[Derek Thunder]

Well, we've become an entire society spending on margin. Savings rates are actually negative. Our economy depends on people going deeper and deeper into debt to support lifestyles way beyond the means of the average wage earner.

Turns out that putting all the eggs of our economy into a hyped-up housing market was something of a bad idea after all.