February 2010
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The Federal Reserve increases its discount rate.
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US consumer confidence slumps.
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The 2010 budget deficit reaches a new record level.
US equities gained ground in February. The materials and industrials sectors led the way, driven by rising commodity prices and hopes of economic recovery.
In mid-February, the Federal Reserve increased its discount rate (the interest rate it charges banks for the provision of short-term funding). This was widely viewed as a symbolic step towards the end of the emergency measures put in place to address the financial crisis. The timing of the move left markets briefly unsettled, temporarily halting the upward trend.
A fall in consumer sentiment also threatened to derail the market’s progress. The Conference Board’s consumer confidence index fell by 11 points to 46 for February – the lowest level for ten months. This brought doubts about the sustainability of economic recovery in the US, as a reading below 50 indicates contraction.
However, the Fed’s chairman, Ben Bernanke, acted to soothe rattled markets in his speech to Congress near the end of the month. He reaffirmed his commitment to low interest rates, stating “economic conditions are likely to warrant extremely low levels of the federal funds rate for an extended period”. This sparked a rally among financials on Wall Street, with JP Morgan Chase, Bank of America and American Express all making strong gains.
In political news, President Obama divulged that the 2010 budget deficit will be $1.56 trillion – a record level amounting to 10.6% of the total US economy. His $3.8 trillion budget for 2011 includes $100 billion of extra stimulus spending. Later in the month, Mr Obama described the details of his ten-year plan to overhaul the US healthcare system. The $1 trillion scheme will attempt to make health insurance more affordable through tax credits.
