Fed Sees No Need to Raise Rates Soon
In a statement after a two-day policy meeting, the central bank said it would keep its benchmark interest rate at virtually zero, repeating its long-standing mantra that economic conditions were likely to warrant “exceptionally low” rates for “an extended period.”
For practical purposes, analysts said, that means policy makers are still at least six months away from tightening monetary policy.
It was unclear whether Fed policymakers even discussed modifying their language on interest rates, which would be a first step toward a shift in policy. Some officials have worried that even discussing a change in language, which would be disclosed when minutes of the meeting are published two weeks from now, would send the premature signal that higher rates were imminent.
“Economic activity has continued to pick up,” the central bank said, barely acknowledging the jump in economic growth that the government reported last week. As it had said after its meeting in September, the central bank said consumer spending remained constrained by continuing job losses, sluggish growth, reduced wealth and tight credit.
Predicting that economic growth will “remain weak for a time,” the Federal Reserve said that inflation would remain “subdued.”
Over all, the Fed’s statement was on the dour side, no more upbeat than the one it issued after its policy meeting in late September.
The government estimated last week that the
But the Fed chairman, Ben S. Bernanke, has repeatedly warned that the recovery is fragile, that growth will be sluggish and that unemployment will remain very high, above 9 percent, until some time in 2011.
Within the central banks, officials have begun debating when they should start signaling an eventual shift toward tighter policy. Though a few of the Fed’s more hawkish policy makers have rumbled in public about the need to head off future inflation, Mr. Bernanke and other officials have made it clear that it was still too early to hint about changes.
“The one consistent theme with all the Fed speakers is that they’re not going to raise rates any time soon,” said Drew Matus, an economist at Bank of America-Merrill Lynch. “That is the one consistent theme that gets hammered home time and again.”
Fed officials face competing challenges as they try to get monetary policy back to normal over the next several years, and they need to make a judgment about timing. Tightening too early could send the economy back into a downturn, as happened during the late 1930s; waiting too long would set the stage for inflation.
In their statement on Wednesday, Fed officials made it clear they still saw little risk of higher inflation, noting that “substantial resource slack” — a euphemism for high unemployment and unused factory capacity — would keep inflation, and expectations of inflation, “subdued.”
The Fed’s preferred measure of inflation, which excludes prices of food and energy, has climbed by less than 1.5 percent over the past year — well within Mr. Bernanke’s unofficial comfort range of 1 to 2 percent.
The overnight Federal funds rate, the interest rate that banks charge for lending their reserves to each other, has been held between zero and 0.25 percent since last December.
In addition, the Fed has tried to pump up financial markets and the economy by more than doubling the size of its balance sheet — creating more than $1 trillion in new money out of thin air for its emergency credit programs — and to drive down long-term interest rates by purchasing Treasury bonds and mortgage-backed securities.
Fed officials have already cut back some of their emergency loan programs and stopped buying Treasury bonds, and they have said they will stop buying mortgage securities by next March.
To tighten monetary policy, Fed officials will have to both raise interest rates and start reducing the size of its balance sheet by selling all the securities it has acquired.
Source: By EDMUND L. ANDREWS - NYTimes
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