US Fed again holds interest rate steady at 2%

WASHINGTON (ICIS news)--The US Federal Reserve Board voted on Tuesday to keep its key federal funds interest rate at 2% and hinted broadly that it does not plan any near-term rate increases, citing continuing downside risks to the US economy.

The US central bank’s rate-setting Federal Open Markets Committee (FOMC) noted that while economic activity expanded in the second quarter on the strength of export growth and consumer spending, “labour markets have softened further, and financial markets remain under considerable stress”.

“Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters,” the committee said.

In “Fed-speak” terms that are likely to be seen as favouring an extended run for the 2% rate, the committee said, “Over time, the substantial easing of monetary policy [rate cuts], combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.”

The Fed noted that while inflationary pressures remain high, driven in large part by high prices for energy products and other commodities, the committee “expects inflation to moderate later this year and next year”.

While the downside risks to US economic growth appear to be the main near-term focus of the Fed, the committee statement also noted that “the upside risks to inflation are also of significant concern”.

At its earlier monetary policy meeting on 25 June, the Fed also held the federal funds rate at 2%, ending a series of seven straight cuts.