November 6, 2009
The Federal Reserve recently stated it was holding short-term interest rates at near zero and would probably make no change for the foreseeable future, despite a turnaround in economic activity.
Chairman Ben Bernanke and others at the policy-setting Federal Open Market Committee reiterated that they would maintain the benchmark overnight lending rate between zero and 0.25%, adding that the rate was likely to remain “exceptionally low” for “an extended period.”
The statement said the Fed considered the danger of rising prices to be low because of the continued existence of what it called “substantial resource slack,” namely high unemployment and unused factory capacity. Given the still-troubled condition of the economy, most analysts had expected the Fed to maintain its low-rate approach, but some had expected the official language to be modified to say the policy would continue “for some time,” instead of the stronger “for an extended period.”
Among analysts who parse the Fed’s language, that seemingly tiny shift was seen as a way for the central bank to give a nod to long-standing concerns among bond investors and others who have worried about inflation.
No new light was shed on a possible exit strategy — when and how the central bank would begin to unwind various emergency programs to ease the credit crunch and prop up the economy. Officials said they would continue to purchase mortgage-backed securities and agency debt, which has helped to reduce long-term interest rates.
Fed officials gave a somewhat subdued assessment of the economic recovery. They said that “economic activity has continued to pick up,” including in the housing sector,” and businesses are making “progress in bringing inventory stocks into better alignment with sales.” Officials said “economic activity is likely to remain weak for a time,” noting that consumer spending seems to be expanding but remains constrained by persistent job losses and other factors.
The government recently reported that the U.S. gross domestic product, the broadest measure of economic activity, expanded at an annual rate of 3.5% in the third quarter, breaking four consecutive quarters of contraction. The GDP growth, however, was largely driven by federal stimulus, and many analysts remain concerned about the durability of the recovery.
With unemployment still high and the uncertainties in the economy, many analysts don’t think the Fed will raise interest rates until the middle of next year, at the earliest. The Fed’s next policy-setting meeting is scheduled for Dec. 15-16.