U.S. Fed promises to hold rates near zero for two years

The US Federal Reserve building in Washington, DC. PHOTO: AFP

The US Federal Reserve building in Washington, DC. PHOTO: AFP  

The U.S. Federal Reserve has promised to hold U.S. interest rates at “exceptionally low levels” until the middle of 2013, in the wake of the worst market turmoil last week, since the financial meltdown of 2008.

Walking a tightrope between panicking investors further and appearing unresponsive to the market turbulence that wiped off over a trillion dollars of wealth from the bourses, the Fed said that it anticipated low rates of resource utilisation and a subdued outlook for inflation for the next two years.

“To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today [Tuesday] to keep the target range for the federal funds rate at 0 to 0.25 per cent,” the Fed said in a split decision that was however backed by its Chairman, Ben Bernanke.

Seven members of the rate-setting Federal Open Market Committee voted for the decision to hold rates at such low levels while three members, including Indian-American Narayana Kocherlakota, dissented.

The dissenters “would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period,” the Fed said in a statement.

The central bank's unusual statement appeared to achieve the desired short-term effect as stock markets round the world rallied with the U.S. Dow Jones index closing the day up 429 points and London's FTSE 100 climbing 64 points in early trading on Wednesday, following Tuesday's gain of 96 points.

However, the Federal Reserve continued to emphasise that significant downside risks remained.

In a statement it said, “The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually”.

While the FOMC said that it expected that inflation would settle over the coming quarters, at levels at or below those consistent with the Committee's dual mandate [to foster maximum employment and price stability], it added that it would “continue to assess the economic outlook in light of incoming information and is prepared to employ [a range of policy] tools as appropriate”.

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