US Fed promises record-low interest rates for at least two years

09 August 2011 20:06  [Source: ICIS news]

Fed chairman Ben BernankeWASHINGTON (ICIS)--The US Federal Reserve Board on Tuesday took the unprecedented step of saying it would hold its current historic low interest rates for at least two years and perhaps longer.

The Fed, the US central bank, said that it was maintaining its current federal funds interest rate at 0%-0.25% - where it has held steady since December 2008 - and would likely keep that key rate at “exceptionally low levels’ at least through mid-2013.

The action seemed aimed at shoring up consumer and market confidence in the US economy in the wake of the nation’s debt limit crisis, the loss of its triple-A credit rating, sharp downturns in Wall Street markets and growing fears of a new recession.

In its statement about the economy, the central bank’s rate-setting Federal Open Markets Committee (FOMC) said that since its last meeting in June, “economic growth so far this year has been considerably slower than the Committee had expected”. 

"Indicators suggest a deterioration in overall labour market conditions in recent months, and the unemployment rate has moved up,” the statement said. 

“Household spending has flattened out, investment in non-residential structures is still weak, and the housing sector remains depressed,” the central bank added.

The Fed also noted that while some temporary factors have contributed to the slowing US recovery - such as the Japan earthquake and higher food and fuel prices - those conditions “appear to account for only some of the recent weakness in economic activity”.

That statement is seen as indicating that US economic problems are more fundamental and cannot be attributed solely to outside forces.

Indeed, while the impact of the Japan tsunami and its related supply disruptions has eased along with domestic US food and fuel prices, the committee said that it “now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting”.

The Fed also said that it and anticipates that the unemployment rate will decline only gradually and that “downside risks to the economic outlook have increased”.

Because of its lower expectations for the economy, the committee said that it “anticipates that economic conditions - including low rates of resource utilisation and a subdued outlook for inflation over the medium run - are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.  

($1 = €0.70)

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

By: Joe Kamalick
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