Fed Vows to Keep Rates Exceptionally Low
Federal Reserve officials kept the overnight lending rate between banks at a range of zero to 0.25%, where it has been for a year, and said the U.S. economy is strengthening
The Federal Reserve repeated its pledge to keep interest rates “exceptionally low” for “an extended period” and said the economy is strengthening.
“Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit,” the Federal Open Market Committee said in a statement today after meeting in Washington. “Businesses are still cutting back on fixed investment” and “remain reluctant to add to payrolls.” Deterioration in the labor market is “abating.”
Chairman Ben S. Bernanke, who faces a confirmation vote for a second term by the Senate Banking Committee tomorrow, is battling what he calls “significant headwinds” of declining credit and continuing job losses. While the economy has returned to growth after the deepest recession since the 1930s, most economists surveyed by Bloomberg News predict the unemployment rate will exceed 10 percent through June. Consumer spending is still below its level of two years ago.
Officials kept their benchmark overnight lending rate between banks in range of zero and 0.25 percent, where it has been for a year. Policy makers restated that low interest rates are contingent on “low rates of resource utilization, subdued inflation trends, and stable inflation expectations.”
“Inflation will remain subdued for some time,” the statement said. The consumer price index, minus food and energy, rose 1.7 percent for the 12 months ending November, unchanged from October, the Labor Department reported today.
The dollar was little changed against the euro after the decision, while stocks pared gains. Treasury notes advanced.
Agency Purchases, Liquidity
The Fed said it will continue purchases of agency mortgage-backed securities totaling $1.25 trillion and about $175 billion of agency debt through the first quarter of next year. The FOMC and the Fed’s Board of Governors
“The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010,” the statement said.
The decision was unanimous.
The FOMC met after a week of reports suggesting economic growth picked up in the fourth quarter. Retail sales climbed 1.3 percent in November, twice as much as anticipated in a Bloomberg News survey of economists. Inventories rose in October for the first time since August 2008, and exports in the same month increased to the highest levels in 11 months.
Forecasts Raised
The numbers led economists at Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM) to raise their forecasts for fourth quarter growth by a full percentage point. JPMorgan lifted its estimate to a 4.5 percent annual growth rate in the final three months of 2009, compared with a previous prediction of 3.5 percent.
Goldman economists increased their estimate to 4 percent from 3 percent. Gross domestic product grew 2.8 percent in the third quarter after shrinking for each of the previous four quarters.
“There is more of a self-sustaining dynamic developing,” Julia Coronado, senior U.S. economist at BNP Paribas SA in New York, said before the announcement. “We are still in a very deep hole.”
Previous Recessions
Consumer spending, which fell the most since 1980 during the recession, rose to $9.25 trillion on an annual basis in the third quarter. Purchases were still below the pre-recession peak of $9.36 trillion in the fourth quarter of 2007.
By contrast, consumption grew every quarter of the March to November 2001 recession. In the 1990 slump, which began in the third quarter of that year, consumption surpassed the pre- recession peak in the third quarter of 1991. The downturn ended in the first quarter of that year.
source: businessweek
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