US Fed holds rate at 0%-0.25%, likely into 2010

04 November 2009 20:07  [Source: ICIS news]

WASHINGTON (ICIS news)--The Federal Reserve Board said on Wednesday that it will continue to hold its key federal funds interest rate in a target range of 0% to 0.25%, noting that the US economy continues to pick up even as unemployment remains troubling.

The Fed said that as the economy struggles to reach normal growth rates, it expects to keep interest rates at their current low rate “for an extended period”, which suggests that the rate will be steady into the first quarter of next year.

The federal funds rate has been at its historic low of 0%-0.25% since 16 December last year and in another month will have been in effect for a full year.

The central bank’s rate-setting Federal Open Market Committee (FOMC) said that economic developments since its last meeting in September suggest that the nation’s economy has continued to pick up speed.

The committee noted, however, that while the crucial housing sector has shown some gains in recent months and household spending appears to be expanding, the economy is still restrained by other factors.

The FOMC statement noted that consumer spending “remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit”.

Consumer spending is the principal driving force of the US economy, accounting for as much as 70% of all commercial activity.

The Fed also noted that while businesses are still cutting back on fixed investment and staffing, they are doing so at a slower pace, and industry continues to make progress in bringing inventory stocks into better alignment with sales.

Significantly, even as the economy continues to recover, the Fed said it sees little risk of an inflationary outbreak.

“With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time,” the statement said.

The central bank said that it “continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period”.

The Fed statement also said that the bank will purchase an additional $1,250bn (€850bn) worth of mortgage-backed securities “to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets”.

However, the Fed said that it would continue to reduce the volume of such purchases and expects to end this stimulative practice by the end of March next year.

($1 = €0.68)

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