Restates its pledge to keep rates ‘exceptionally low’.
Federal Reserve officials signalled a return to economic growth alone won’t warrant higher interest rates, saying an increase will instead depend on when the labour market and inflation pick up.
The Fed’s rate-setting Open Market Committee on Wednesday restated its pledge to keep rates “exceptionally low” for an “extended period”. The panel added for the first time that its commitment depends on “low rates of resource utilisation, subdued inflation trends and stable inflation expectations”.
The comments prompted traders to reduce bets for an increase in borrowing costs in the first half of 2010, given that policy makers are focused on reducing unemployment that’s forecast to rise above 10 per cent. The dollar weakened on Wednesday and short-term Treasury yields fell.
“There are still many downside risks to the recovery,” said Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd in New York. “The Fed looks to be on hold for longer than I thought,” possibly beyond the second quarter, he said.
Policy makers, acting the week after a report showed the US economy expanded in the third quarter for the first time in more than a year, left their target for the overnight interbank lending rate unchanged at a range of zero to 0.25 per cent. The vote of 10 officials was unanimous.
The conditions “put some meat on the bones” of the Fed’s rate stance, said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina.
“The Fed is simply trying to set up conditions or parameters for the continuation of the current easy policy, so that it’s not unlimited with no boundaries,” said Silvia, who previously worked as a senior economist in Congress. Silvia didn’t change his forecast for the Fed to raise interest rates after July 2010.
The dollar weakened after the decision, falling to $1.4861 against the euro from $1.4724 on November 3, the biggest drop since September 8. The yield on two-year Treasuries fell 2 basis points to 0.90 per cent from 0.92 per cent, while yields on 10-year securities rose 6 basis points to 3.53 per cent from 3.47 per cent. A basis point is 0.01 percentage point.
US employers probably reduced payrolls by 175,000 in October, according to the median forecast in a Bloomberg News survey of 84 economists ahead of Labour Department report. The unemployment rate probably rose to 9.9 per cent from 9.8 per cent, based on the median estimate of 81 analysts.
Consumer prices have fallen on an annual basis for the past seven months in the longest such decline since 1955. The consumer-price index fell 1.3 per cent in the 12 months to September. Excluding food and energy, prices rose at a 1.5 per cent annual rate.
While some measures of inflation expectations have been rising, the Fed said longer-term expectations are “stable” and reiterated that price increases “will remain subdued for some time”.
The ebb of the global crisis that caused more than $1.6 trillion in credit losses and writedowns has already helped spur central banks from Australia to Norway to start increasing borrowing costs.
