The US Federal Reserve renewed its promise to keep interest rates near zero for an “extended period” on Tuesday, even as it sounded more upbeat about jobs.
The central bank’s nod to a firmer job market after the deepest recession in decades offered a hint it may be moving closer to dropping its promise to hold borrowing costs at rock bottom levels.
It reintroduced a note of caution about the housing sector, however, and repeated its view the economy’s recovery would likely be moderate for a time. It also said inflation was likely to remain subdued as it held interbank overnight rates in a zero percent to 0.25 percent range.
PHOTO: REUTERS
“The [Fed’s policy] committee ... continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” the central bank said in a statement.
US stocks added to gains after the decision, while the US dollar slipped against the euro and yen, and prices for US government bonds rose. The Dow Jones Industrial Average and the large-cap Standard & Poor’s 500 Index closed at multi-month highs.
“The statement suggests that the doves still have the upper hand,” said Paul Dales, an economist for Capital Economics in Toronto. “Admittedly, the tone was more upbeat ... but the usual caution is still evident.”
For a second consecutive meeting, Kansas City Federal Reserve Bank president Thomas Hoenig dissented, saying the commitment to keep rates exceptionally low for an extended period was no longer warranted.
The Fed said the labor market was “stabilizing,” a more optimistic view than expressed after its last meeting in late January, when the policy-setting committee said only that deterioration in the labor market was “abating.”
The central bank also said business spending on equipment and software had risen “significantly,” also a brighter assessment than the one offered in January.
The central bank reiterated that it intends to wrap up purchases of mortgage-related assets by the end of this month, but said it would monitor the economic outlook and financial developments to see if more support was necessary.
As those purchases come to a close, officials voiced heightened concern about the very sector they were meant to assist, saying that new homebuilding activity was “flat, at a depressed level.”
The Fed has held the benchmark federal funds rate near zero since December 2008 to bolster the economy and help it through the most severe financial crisis in generations. In March last year, it committed to holding rates very low for “an extended period.”
The central bank has allowed special lending facilities to close, however, as financial markets have returned to normal after the crisis and it recently raised the discount rate it charges banks for emergency loans to 0.75 percent from 0.5 percent.
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