US Fed sees rates near zero for “extended period”

US Fed sees rates near zero for “extended period”
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First Published: Thu, Nov 05 2009. 12 48 PM IST
Updated: Thu, Nov 05 2009. 12 48 PM IST
Washington: The US Federal Reserve on Wednesday expressed growing confidence that an economic recovery was building, even as it stuck to its commitment to keep borrowing costs near zero for “an extended period.”
As expected, the central bank closed out a two-day meeting with a decision to keep benchmark overnight interest rates in a range of zero to 0.25%. The vote was unanimous.
In a statement, the Fed said the US economy had “continued to pick up” since its last meeting in September, but it expressed concern the recovery was likely to be muted.
“Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit,” it said. While still emphasizing risks, the Fed was a bit more upbeat than in September, when it had simply said spending was “stabilizing.”
The Fed cut interest rates to near zero last December and has pumped more than $1 trillion into the economy to tame a severe financial crisis and the deepest recession since the 1930s.
Now that the economy is starting to recover, financial markets are increasingly wondering when the Fed and other central banks around the globe will begin to remove the extraordinary economic support they have provided.
The US central bank was more explicit than it had been previously on why it expects to be able to keep rates “exceptionally low” for a long time, citing the slack that has built up in the economy and the lack of an inflationary threat.
By citing “low rates of resource utilization, subdued inflation trends, and stable inflation expectations,” analysts said the Fed was providing a road map to follow to determine when it may finally begin to tighten policy.
Testing the waters?
In another shift, the Fed said it would buy only about $175 billion of debt issued by federal housing agencies. It had planned to buy up to $200 billion to help keep mortgage costs low.
Some analysts saw the move as a baby step away from the Fed’s “quantitative easing” policy of flooding the financial system with money, but the Fed said it curtailed purchases because the supply of the debt was scarce.
US stocks wavered after the Fed’s decision, but gave up most of their earlier gains by the end of the day, with the broad S&P 500 index closing up only marginally.
Prices for US government debt fell on worries about massive debt supply, while interest rate futures turned higher as traders cut bets the Fed would soon step back from its easy money policy. The US dollar weakened.
“If there is any surprise, it sounds like there is not even any hint that they are going to raise rates soon,” said Robert MacIntosh, chief economist at Eaton Vance Corp in Boston. “We’ve got a number of Fed meetings to go before we will get any kind of increase.”
Top Fed officials, including chairman Ben Bernanke, have said the US recession has left a legacy of high unemployment and idle factories that should keep price pressures in check.
A private report on Wednesday showed US companies cut payrolls at the slowest pace in more than a year, adding to a sense that the economic numbers are moving in the right direction.
The government on Friday also is expected to report that employers are cutting fewer jobs, but the jobless rate is forecast to rise to a fresh 26-year high of 9.9% and unemployment is expected to keep climbing into next year.
The world’s largest economy grew at a faster-than-expected 3.5% annual rate in the third quarter, which effectively signaled the end of the downturn.
Suggesting further momentum, data on Monday showed manufacturing activity hit its highest level in 3-1/2 years last month, though a report on Wednesday showed the nation’s vast services sector was growing only modestly.
Wrestling with an exit
The budding recovery has started to lift the spirit of some investors. Billionaire Warren Buffett demonstrated his faith in the economy’s prospects with an announcement on Tuesday that his company, Berkshire Hathaway Inc, would spend $26 billion to buy the nation’s largest rail company, Burlington Northern Santa Fe Corp.
Still, worries linger. The banking system remains under pressure from loan losses, and credit remains tight.
Most analysts at top US banks have been expecting the Fed to keep interest rates on hold until mid-2010 or later. Before it raises rates, it is expected to begin to withdraw some of the cash it pumped into the economy to keep credit flowing.
Other central banks also are wrestling with how best to spur economic growth and when to withdraw extraordinary measures to support their economies.
The European Central Bank is expected to keep rates on hold at a record-low 1.0% on Thursday, while there is a good chance the Bank of England will expand its large asset purchase program at a meeting the same day.
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First Published: Thu, Nov 05 2009. 12 48 PM IST