US Fed warns that nation’s recovery is slowing further

21 September 2010 21:46  [Source: ICIS news]

WASHINGTON (ICIS)--The US Federal Reserve Board on Tuesday warned that the nation’s recovery has slowed further and that the central bank soon might take additional measures to boost the money supply and rekindle business and consumer spending.

In what had been a widely expected decision, the meeting of the board’s rate-setting Federal Open Markets Committee (FOMC) said it would keep the existing record-low federal funds interest rate at 0% to 0.25%.

That lowest-ever rate has been in place since December 2008, and the committee statement on Tuesday indicated there was little near-term prospect of the Fed raising it.

The Fed’s statement about the nation’s economy suggested that the central bankers are increasingly worried about the recovery and its long-term viability.

“Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months,” the Fed said.

“Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit,” the statement added.

Household spending, also known as consumer spending, is the principle driving force of the US economy, accounting for as much as 70% of all business production and commercial activity.

In addition, the committee noted that “business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in non-residential structures continues to be weak”.

“Employers remain reluctant to add to payrolls,” the Fed added. This too is a key factor in hopes for a sustained recovery, because as unemployment remains high, even those employed would be wary of spending for fear that their jobs might be in jeopardy.

Although US new home construction showed an upturn in August, the Fed noted that “housing starts are at a depressed level [and] bank lending has continued to contract”.

In short, said the committee, “the pace of economic recovery is likely to be modest in the near term”.

The Fed also expressed concern over the low rate of inflation.

“Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability,” the central bank said.

Ordinarily, the US central bank governors regard inflationary pressures as economic enemy number one, but the current rate of inflation - almost nonexistent - indicates that consumer and business demand for products and services is so weak that manufacturers and providers are reluctant to raise prices at all.

In saying that it will keep the current federal funds rate at 0% to 0.25%, the Fed noted that the still sluggish performance of the US economy is “likely to warrant exceptionally low levels for the federal funds rate for an extended period”.

The central bank governors went so far as to suggest that they may take additional measures - perhaps to include cutting interest rates paid to banks for their deposits with the Fed and further large-scale purchases of US Treasury notes by the Fed - to increase the money supply so as to spur commercial lending and consumer spending.

“The committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent” with normal economic growth.

To discuss issues facing the chemical industry go to ICIS connect
Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
+1 713 525 2653

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly