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US Fed leaves rates alone

Trader Mark Heller shouts as he signals a trade on the floor of the NASDAQ Futures trading pit at the Chicago Mercantile Exchange in Chicago on Tuesday, after the US Federal Reserve announced it would leave interest rates unchanged. PHOTO: REUTERS

US Federal Reserve policy makers gave the economic recovery a boost by leaving the benchmark US lending rate at a 40-year low, making it easier for consumers to buy cars and houses and for companies to invest.

Central bankers voted unanimously to keep the overnight bank lending rate at 1.75 percent and said the economy is just getting back on its feet after a recession that started in March of last year. It was the third time in a row the Fed has held rates steady after 11 reductions last year.

The Fed's policy-setting Open Market Committee used almost identical language after its last two meetings to say the economy needed time to recover.

"The degree of the strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain," the Fed said in a statement announcing its decision.

Low rates mean that banks will be able to boost profits because they won't have to lower what they charge for loans to attract borrowers. Consumers, who pushed car and home sales to records in recent months, are likely to keep taking out loans for those purchases. Companies, which took advantage of falling rates to sell a record US$820 billion in bonds last year to refinance debt, may match that performance this year.

Outlook * Central bankers voted unanimously to keep the overnight bank lending rate at 1.75 percent. * In explaining its move, the Fed noted that the US economy is just getting back on its feet after a recession that started in March of last year. * Economists expect rates won't increase before the Fed's September meeting and policymakers won't take any action in June and August.

Economists said the Fed's statement suggests the first rate increase won't happen before the Fed's September meeting and that central bankers will keep rates unchanged at their meetings in June and August. Investors began to reach a similar conclusion based on trading in federal funds futures contracts.

The statement "leaves me concluding the Fed is well aware of a distinct slowing down in the economy," said Allen Sinai, president and chief global economist at Decision Economics Inc in Boston. "I don't regard that as a very optimistic statement on the state of the economy." Fed Chairman Alan Greenspan told Congress three weeks ago that weak job growth may restrain consumer spending, which accounts for two-thirds of the economy.

The economy has added jobs in only one month since July, and the unemployment rate rose to a 7 1/2-year high of 6 percent last month, raising concerns about the fragility of the rebound.

Fed officials have said in recent speeches that they see little sign of a pickup in inflation. And Tuesday's report that worker productivity surged in the first quarter at the fastest pace in almost two decades suggests inflation isn't likely to become a problem. That will give the Fed room to hold rates steady until the rebound is secure.

All signs indicate a recovery began late last year. Gross domestic product expanded at a 5.8 percent annual rate in the first quarter, the fastest in more than two years.
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