US Fed holds key interest rate steady

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(Xinhua)
Updated: 2009-06-25 13:12

WASHINGTON:The US Federal Reserve on Wednesday kept a key interest rate unchanged at a record low of between zero to 0.25 percent to support the world's largest economy which has been in a recession since December 2007.

A man walks in front of the US Federal Reserve building in Washington, June 24, 2009.

Information received recently suggested that "the pace of economic contraction is slowing," the Fed said. But it also noted that "economic activity is likely to remain weak for a time."

In recent month, conditions in financial markets have generally improved, said the central bank in a statement following its two-day policy-making meeting in Washington.

Meanwhile, "household spending has shown further signs of stabilizing but remains constrained by ongoing jobs losses, lower housing wealth, and tight credit," it said.

"Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales," it added.

Although the recession is easing, the Fed believes that the economy will keep a lid on inflation.

"The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures," and the Fed "expects that inflation will remain subdued for some time," the Fed said.

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.

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 March, the Fed will purchase a total of up to 1.25 trillion dollars of agency mortgage-backed securities and up to 200 billion dollars of agency debt by the end of the year. Now, nearly 456 billion dollars worth of those securities have been purchased.

In addition, the Fed will buy up to 300 billion dollars of Treasury securities by autumn, as part of its plan to bring down interest rates it cannot directly control, according to the statement. So far, the Fed has bought about 177.5 billion dollars in Treasury bonds.

Doing so would help the ailing economy because many kinds of debt -- from mortgages to corporate bonds -- are linked to Treasury rates. Fed purchases could boost Treasury prices and drive down their rates. That would ripple through and lower rates on other kinds of debt.

The Fed's decision to leave the interest rate unchanged was in line with economists' expectations.

Most economists believe that the Fed will keep the target range for its bank lending rate between zero and 0.25 percent through the rest of this year and probably into next year to help spur the economy.

Fed Chairman Ben Bernanke has predicted that the recession will end later this year. On Wednesday, the Fed said it continues to anticipate that policy actions, fiscal and monetary stimulus, and market forces will contribute to "a gradual resumption of sustainable economic growth in a context of prices stability."

In the first quarter of this year, the US economy shrank at an annual rate of 5.7 percent, slightly less than the 6.3 percent drop in the previous quarter. Economists are predicting the contraction will slow the current April-June period as the government's stimulus begins to take hold.

On Wednesday, the statement also indicated that the Fed keeps the door wide open to making changes if economic conditions warrant.

The Fed "will 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," said the statement.

"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," it added.