US to keep interest rates at near zero
The US Federal Reserve has said it is likely to keep interest rates at record lows for the next two years after acknowledging that the US economy is weaker than it had thought.
The Fed announced that it expects to keep its key interest rate close to zero until mid-2013.
The Fed had previously only said that it would keep interest rates low for “an extended period”.
Fed policymakers used significantly more downbeat language to describe current economic conditions, adding that so far this year the economy has grown “considerably slower” than the Fed had expected.
They also said that temporary factors, such as high energy prices and the Japan crisis, only accounted for “some of the recent weakness” in economic activity.
The more explicit time frame is aimed at calming nervous investors, offering them a clearer picture of how long they will be able to obtain ultra-cheap credit. The low rate will remain for at least a year longer than many economists had expected.
However, stocks initially fell after the statement was released, possibly reflecting disappointment that the Fed did not announce another round of bond buying.
Fed officials met against a backdrop of speculation that they would say or do something new to address a darkening economic picture. The stock market has plunged and government data have signalled a weaker economy in the four weeks since chairman Ben Bernanke told Congress that the Fed was ready to act if conditions worsened.
The economy grew at an annual rate of just 0.8% in the first six months of the year. Consumers have cut spending for the first time in 20 months, and wages are barely rising. Manufacturing is growing only slightly, while service companies are expanding at the slowest pace in 17 months.
Employers hired more in July than during the previous two months. But the number of jobs added was far fewer than needed to significantly dent the unemployment rate, now at 9.1%. The rate has exceeded 9% in all but two months since the recession officially ended in June 2009.
Fear that another recession is unavoidable, along with worries that Europe may be unable to contain its debt crisis, has rattled stock markets. The Dow Jones industrial average has lost nearly 15% of its value since July 21. On Monday, it fell 634 points – its worst day since 2008 and sixth-worst drop in history.
This turmoil was was further fuelled by Standard & Poor’s decision to downgrade long-term US debt.
Later this month at the Fed’s annual retreat in Jackson Hole, Wyoming, Mr Bernanke will likely address the weakening economy, the S&P downgrade and the market turmoil.
Earlier this summer, the Fed ended a 600 billion US dollar Treasury bond-buying program. The bond purchases were intended to keep rates low to encourage spending and borrowing and to lift stock prices.
