The US Federal Reserve said Wednesday that the US economic activity has continued to “pick up,” and decided to keep a Key interest rate unchanged at a record low of between Zero to 0.25% to “prop up” the economy. Information received recently suggested that “economic activity has continued to pick up,” the US Fed said, noting that “economic activity is likely to remain weak for a time.” In recent weeks, conditions in financial markets were roughly unchanged, but activity in the housing sector has increased over recent months, said the US Central Bank in a statement following its 2 day policy-making meeting in Washington. Meanwhile, household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales, according to the Federal Reserve.
Although the economy is stabilizing, the Fed believes that the economy will keep a lid on inflation. “With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable,” the Fed “expects that inflation will remain subdued for some time.”
Against this backdrop, the Fed decided to hold the Key interest rate, or federal funds rate, which commercial banks charge each other for overnight loans, unchanged at a record low of between Zero to 0.25%.
The decision means that commercial banks’ prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will stay around 3.25 percent, the lowest rate in decades. Moreover, the Fed said that the interest rate is likely to remain at the current low level for “an extended period”.
The Fed also decided to stay the course on existing programs intended “to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets.”
As announced in previous meetings, the Fed will purchase a total of up to US$1.25Tof agency mortgage-backed securities. But the US Central Bank said it would buy about US$175B of agency debt, less than the maximum of US$200B it had originally announced, citing limited availability.
The Fed said it will “gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of Q-1 Y 2010.”
The policy setting Federal Open Market Committee (FOMC), which approved the monetary policy unanimously, said it would continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.
“The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted,” said the Fed in the statement.
The Fed’s decision to leave the interest rate unchanged was in line with economists’ expectations.
Most fed observers believe that the Fed will keep the target range for its bank lending rate between Zero and 0.25% through the rest of this year and probably into next year to help spur the economy North. Fed Chairman Ben Bernanke has predicted that the recession “is very likely over.”
Yesterday, the Fed said it continues to “anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.”
The US economy rose at a pace of 3.55% in Q-3 after four consecutive quarters of contraction, a strong signal that the worst recession since the Great Depression has ended.
The Q-3 gain was better than the 3.3% annualized increase that experts had expected. In Q-1 and Q-2 Y 2009, the US real GDP decreased 6.4% and 0.7% respectively. In Q’s 3 & 4 Y 2008, the economy contracted 2.7% and 5.4%.
The recent good news signed that “we are moving in the right direction,” said President Barack Obama on Saturday, but he also warned that there were still many challenges ahead. “While we have a long way to go before we return to prosperity, and there will undoubtedly be ups and downs along the road, it’s also true that we’ve come a long way,” Obama said in his weekly radio and Internet address. “Positive news today does not mean there won’t be difficult days ahead,” he stressed.
-Paul A. Ebeling, Jnr. www.livetradingnews.com
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