US Fed says economy likely to make gains, but holds rate steady

19 June 2013 21:13  [Source: ICIS news]

WASHINGTON (ICIS)--The US economy and the nation’s labour market continue to improve at a moderate pace and are likely to make further gradual gains, the Federal Reserve Board said on Wednesday, saying it would maintain its record-low interest rates.

At the end of a two-day economic and rate-setting session, the central bank’s federal open market committee (FOMC) said that while household spending, business investment and the housing sector have strengthened further, “unemployment remains elevated”.

The US jobless rate rose narrowly in May to 7.6%.

The committee statement said that the Fed expects that US economic growth will proceed at a moderate pace and that the unemployment rate will decline gradually.

In another fairly optimistic phrase, the Fed said that “downside risks to the outlook for the economy and the labour market have diminished since the fall”, meaning since the fourth quarter of last year.

Significantly, the Fed also said that it would continue its policy of purchasing mortgage-backed securities at a pace of $40bn (€30bn) per month and monthly buys of $45bn in long-term Treasury Department securities to exert downward pressure on long-term interest rates.

There had been speculation on Wall Street that the Fed, in anticipation of a stronger recovery and fearful of inflationary pressures, might start to roll back its “quantitative easing” policy by reducing the amount of securities it is buying each month.

As expected, the Fed said it would keep its key federal funds interest rate at 0%-0.25%.  The rate has been at that rock-bottom level since December 2008.

The central bank repeated its earlier policy declaration, saying that it plans to keep the rate at that level as long as US unemployment remains above 6.5% and inflation holds at 2.5% or lower.

Although the Fed said that it expects the slow US recovery to continue, it lowered its outlook for the nation’s gross domestic product (GDP) growth for this year to a range of 2.3% to 2.6%.

At the last meeting of the FOMC in March, the Fed governors said that the 2013 GDP growth range would be 2.3% to 2.8%.

But the Fed raised its outlook for 2014, saying that it expects GDP growth next year would be 3% to 3.5%, a slight improvement from its March forecast of 2014 GDP expansion of 2.9% to 3.4%.

One of the 12 Fed governors, Esther George, voted against the decision to keep the federal funds rate at its historic 0%-0.25% rate, warning that extending the record-low rate “increased the risks of further economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations”.

($1 = €0.75)

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By: Joe Kamalick
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