U.S. Fed leaves key interest rate unchanged

April 30, 2009 10:57 am 

WASHINGTON, April 30 — The U.S. Federal Reserve on Wednesday held a key interest rate unchanged at a record low of between zero and 0.25 percent to support the struggling economy which has been in a recession since December 2007 and snatched 5.1 million jobs.

Concluding a two-day policy-making meeting, the central bank said it sees signs the recession may be easing, but warned that the economy is likely to remain weak.

"Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time, " the Fed said in a statement following the meeting.

The Fed "continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability," it added.

In the statement, the Fed repeated its position that it "will employ all available tools to promote economic recovery and to preserve price stability."

It voted unanimously to maintain the target range for the federal funds rate, which commercial banks charge each other on overnight loans, at zero to 0.25 percent, and stated that " economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Meanwhile, the central bank would carry out its vast program to purchase Treasury debt and other securities "to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets."

As announced in March, the Federal Reserve will purchase a total of up to 1.25 trillion dollars of agency mortgage-backed securities and up to 200 billion dollars of agency debt by the end of the year.

In addition, the Fed will buy up to 300 billion dollars of Treasury securities by autumn, as part of its plan to bring down interest rates it cannot directly control, according to the statement.

Doing so would help the ailing economy because many kinds of debt — from mortgages to corporate bonds — are linked to Treasury rates. Fed purchases could boost Treasury prices and drive down their rates. That would ripple through and lower rates on other kinds of debt.

The Fed's decision to leave the key interest rate unchanged was in line with economists' expectations.

Many economists now predict that the Fed will hold the bank lending rate in this low level for the rest of this year and for most — if not all — of next year.

Like many private economists, the Fed at present does not expect inflation to become a problem. In light of increasing economic slack here and abroad, the Fed expects that inflation will remain "subdued," the statement said.

Moreover, it sees "some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."

Some economists, however, said that it's mindful of the risks of pumping more money into the economy, bailing out financial institutions and leaving the key rate at a record low for too long.

Those steps could ignite inflation when the economy begins recovery, put taxpayers' money in danger and encourage companies to make high-stake gambles, they warned.

Against this backdrop, the Fed pledged in the statement it will "continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments."

In the first quarter of this year, the U.S. economy shrank at an annual rate of 6.1 percent, only slightly smaller than the 6.3- percent drop in the previous quarter, the Commerce Department reported on Wednesday.

Many analysts were predicting the U.S. economy would shrink less in the current April-June period as the government's stimulus begins to take hold.

But the recent outbreak of swine flu, which started out in Mexico and has spread to the United States and elsewhere, poses a new potential danger. The flu could stifle trade and force consumers to cut back further, worsening the recession.

For all of this year, the economy of the United States, at the center of an intensifying global financial storm, is now projected by the International Monetary Fund (IMF) to contract by 2.8 percent in 2009, following the 1.1-percent growth in 2008, the smallest gain since 2001.

Despite large cuts in policy interest rates, credit is exceptionally costly or hard to get for many households and firms, reflecting severe strains in financial institutions, the IMF said last week in its latest World Economic Outlook report.

"In addition, households are being hit by large financial and housing wealth losses, much lower earnings prospects, and elevated uncertainty about job security, all of which have driven consumer confidence to record lows," it warned.

The Obama administration is counting on the 787-billion-dollar stimulus, which combines tax cuts and increased government spending on public projects, to help bolster economic activity later this year. (PNA/Xinhua) ALM/ebp

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