The impact of interest rates

The US economy may have grown at nearly 3% in the last quarter of 2011, but the Federal Reserve announced last week that they do not expect to raise interest rates until the end of 2014. It has cut its growth forecast for 2012 from 2.5-2.9%, to 2-2.7%, and says that the economy faced “significant downside risks” and that it “expects to maintain a highly accommodative stance for monetary policy” - which I take to mean expansionary.

This article about that interest rate decision is useful for economics teachers and students as it highlights a couple of results of that announcement; firstly that the dollar’s exchange rate immediately lost value as the interest rate made the US a less attractive place to keep cash, and secondly that government benefited as the cost of its borrowing in markets for 10 years fell from 2.06% to 1.94%, as traders priced in the lower medium-term interest rate expectations.