Fed seen renewing low rates, extended period vow


Reuters | Tue Mar 16, 2010 | 7:14pm IST

The US Federal Reserve held benchmark rates near zero on Tuesday and renewed a promise to keep them exceptionally low for an extended period while pointing to increased momentum in the economy’s recovery. The central bank’s nod to a firmer rebound from the deepest recession in decades hints that it is moving closer to dropping its promise to hold borrowing costs at rock bottom levels, suggesting rate hikes could come within several months. 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 central bank reiterated that it intends to wrap up purchases of mortgage-related assets by the end of March, but would monitor the economic outlook and financial developments to see if more support is necessary.

The Fed said the labour market was "stabilizing," a view that was more upbeat than at the last meeting in late January, when the policy-setting committee said only that deterioration in the labour market was "abating." The central bank also said business spending on equipment and software had risen "significantly," also a brighter assessment than the one it gave in late January. 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. Last March, it committed to holding rates very low for "an extended period." The economy resumed growth in the second half of last year, and expanded at a    

robust 5.9 percent annual clip in the final three months of the year. Although the unemployment rate held at a lofty 9.7 percent in February as the economy lost 36,000 jobs, some of the lost jobs were pinned on blizzards that hit much of the nation and many economists expect payroll growth as early as March. Gains in manufacturing activity and retail sales have added to evidence the recovery was gaining traction.

The Fed has allowed special lending facilities to close 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. Fed officials stressed the move was in keeping with the settling of financial markets and was not a precursor to efforts to tighten lending conditions. However, policymakers have begun to spell out steps they anticipate taking to move away from their easy money policies when the recovery gains steam. Officials say the Fed would likely start by pulling back some of more than $1 trillion it pumped into the economy during the crisis before it begins raising rates.

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