US Fed holds interest rate steady, gives no hint of increase

27 April 2011 18:41  [Source: ICIS news]

WASHINGTON (ICIS)--The Federal Reserve Board on Wednesday said it would maintain its key interest rate at the historically low 0.0-0.25% for an extended period, giving no hint that it might soon begin to edge the rates up as the nation’s economic recovery gains speed.

Some Fed watchers had been anticipating that the US central bank would start raising rates sometime in the near future. But the bank governors gave no such indication.

The statement by central bank’s rate-setting Federal Open Markets Committee (FOMC) was largely unchanged form the committee’s last meeting in mid-March.

The statement said: “The economic recovery is proceeding at a moderate pace, and overall conditions in the labour market are improving gradually.”

Household spending and business investment in equipment and software continue to expand, the committee said, but noted: “Investment in non-residential structures is still weak, and the housing sector continues to be depressed.”

In addition, “Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the committee met in March.”

Ordinarily, those increasing costs for commodities and crude would push the Fed toward perhaps a modest boost to interest rates to head off inflationary pressures.

But the committee said that while “inflation has picked up in recent months, longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued”.

Those recent commodity and crude price gains will have only “transitory” influence on inflation, the statement said.

The Fed also said it would continue the policy it launched this past November of buying US Treasury securities, and it expects to complete its planned purchase of as much as $600bn (€408bn) by the end of the second quarter this year.

By buying up Treasury securities, the Fed essentially is printing money and pumping still more liquidity into the US economy. It is a policy aimed at encouraging banks to make more loans to businesses - many of whom still complain that bank loan criteria are too strict.

The policy also has the effect of weakening the US dollar, which makes US exports more attractive and competitive in overseas markets.

In announcing that the key federal funds rate would remain at 0.0-0.25% - where it has been since December 2008 - the Fed said that it “continues to anticipate that economic conditions, including low rates of resource utilisation, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period”.

That phasing is taken to mean that the central bank anticipates no rate increase for several months at least.

The Fed’s next rate-setting meeting is on 21-22 June.

($1 = €0.68)

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy

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