Federal Reserve holds rates close to zero

6/22/2011

federal reserve rates

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The Federal Reserve stayed the course on monetary policyWednesday, keeping interest rates near zero as it cited temporary factors for the unexpectedly sluggish growth in the US economy.

The Fed open Market Committee unanimously decided to hold the ultra-low rate, end a $600 billion bond-buying program by June 30 and continue to reinvest its principal payments from security holdings.

“The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee expected,” the policy-setting FOMC said after a two-day meeting.

But the slowdown was mainly due to factors that probably would be temporary such as higher energy prices, it said.

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In quarterly economic projections released after the meeting, the Fed slashed about a half point off its estimate of gross domestic product growth for 2011, to a range between 2.7 percent and 2.9 percent.

The central bank decided to keep its key target interest rate between zero and 0.25 percent — where it has been since December 2008 — in an effort to boost economic growth.

For the 22nd consecutive meeting, Fed policymakers said the rate would likely remain exceptionally low “for an extended period.”

Since its last meeting in April, economic conditions had unexpectedly deteriorated, the Fed said, but stressed that the negative factors would be fleeting.

“Recent labor market indicators have been weaker than anticipated,” the Fed committee said, noting the unemployment ratehit 9.1 percent in May.

“The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan.”

A recent pickup in inflation was mainly due to higher prices for some commodities and imported goods, as well as the recent supply chain disruptions from the Japan tsunami and nuclear disaster, the central bank said.

“However, longer-term inflation expectations have remained stable,” said the Fed, whose dual mandate is to foster maximum employment and price stability.

The Fed maintained an optimistic tone on the economic outlook, predicting the lackluster recovery would gather steam and the elevated jobless rate would slowly fall.

“The committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the committee judges to be consistent with its dual mandate.”

The Fed on Wednesday also said it would allow its $600 billion second round of bond buying, dubbed QE2, to expire June 30 as scheduled.

Last November the central bank was forced to abort its first effort to freeze stimulus spending and instead launched QE2 as fears grew that the world’s largest economy could suffer a double-dip recession.

The Fed also announced it would continue its existing policy of reinvesting principal payments from its securities holdings.

With its key monetary tool at a rock-bottom rate, the Fed has spent more than $2 trillion on mortgage securities and other assets to boost economic growth since the crisis began.

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