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Federal Reserve holds key interest rate steady

Published: 27/01/2010 05:00

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The Federal Reserve said on Wednesday decided to keep a key interest rate unchanged at a record low of between zero to 0.25 percent to prop up the economy.

SIGNS OF ECONOMIC IMPROVEMENT

Information received recently “suggested that economic activity has continued to strengthen and that the deterioration in the labor market is abating,” the Fed said.

In recent weeks, household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit, said the U.S. central bank in a statement following its two-day policy-making meeting in Washington.

Meanwhile, business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls.

Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth, according to the Federal Reserve.

Although the pace of economic recovery is likely to be moderate for a time, the Fed anticipates a gradual return to higher levels of resource utilization in a context of price stability.

“With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, ” the Fed expected that “inflation is likely to be subdued for some time.”

LOW RATE CONTINUES FOR EXPANDED PERIOD

Against this backdrop, the Fed decided to hold the key interest rate, or federal funds rate, which commercial banks charge each other for overnight loans, unchanged at a record low of between zero to 0.25 percent.

The decision means that commercial banks’ prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will stay around 3.25 percent, the lowest rate in decades.

Moreover, the Fed said that the interest rate is likely to remain at the current low level for “an extended period”.

The Fed also decided to stay the course on existing programs intended “to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets.”

As announced in previous meetings, the Fed will purchase a total of up to 1.25 trillion dollars of agency mortgage-backed securities.

But the U.S. central bank said it would buy about 175 billion dollars of agency debt, less than the maximum of 200 billion dollars it had originally announced.

The Fed said it “is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter.”

With credit clogs easing, the U.S. central bank said it plans to wind down by March 8 a program, dubbed the Term Auction Facility, that provides banks with low costs loans.

In addition, it noted that it will dismantle a handful of other emergency lending programs set up during the financial crisis on Feb. 1, when they are set to expire.

ONE VOTE AGAINST DECISION

The policy setting Federal Open Market Committee (FOMC), which approved the monetary policy, said it would continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

The Fed’s decision to leave the interest rate unchanged was in line with economists’ expectations.

Most economists believe that the Fed will keep the target range for its bank lending rate between zero and 0.25 percent until the summer to help spur the economy.

However, Kansas City Fed president Thomas Hoenig voted against the decision to keep the key interest rate steady. He believed that “the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted,” according to the Federal Reserve.

The U.S. economy rose at a pace of 2.2 percent in the third quarter after four consecutive quarters of contraction, a signal that the worst recession since the Great Depression has ended.

However, the third-quarter gain was 0.6 percentage point lower than the 2.8 percent growth rate estimated on November 24, and 1.3 percentage point lower than its first estimate released on October 29.

The increase is also weaker than economists’ expectation of a flat reading, indicating the rebound was not as energetic as previously anticipated.

In the first two quarters of 2009, the U.S. real GDP decreased 6.4 percent and 0.7 percent respectively. In the third and fourth quarters of 2008, the economy contracted 2.7 percent and 5.4 percent.

VietNamNet/Xinhuanet

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