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Cautious Fed Still Sees Low Inflation Risk

Tuesday, 16 Mar 2010 03:08 PM

The Federal Reserve renewed its pledge on Tuesday to keep interest rates near zero for an "extended period" even as it sounded more upbeat about jobs.

The central bank's nod to a firmer job market after the deepest recession in decades offered a hint that it may be moving closer to dropping its promise to hold borrowing costs at rock bottom levels. It also had upbeat words on some business spending.

Still, it repeated its view that the economy's recovery would likely be moderate for a time and that inflation was likely to remain subdued as it held interbank overnight rates in a zero to 0.25 percent range.

"The (Fed's policy) committee ... continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period," the central bank said in a statement.

Stocks added to gains after the decision, while the dollar slipped against the euro and prices for U.S. government bonds rose.

"Unlike the financial system the economy as a whole has not yet healed, so it still requires extremely easy monetary policy," said Zach Pandl, an economist at Nomura Securities International in New York.

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 Fed said the labor market was "stabilizing," a more upbeat view than expressed after its last meeting in late January, when the policy-setting committee said only that deterioration in the labor 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 January.

The central bank reiterated that it intends to wrap up purchases of mortgage-related assets by the end of March, but said it would monitor the economic outlook and financial developments to see if more support is necessary.

It called new homebuilding activity "flat at a depressed level." The Fed made no mention of housing in the statement following its Jan. 26-27 meeting, but in December had said the housing sector had shown some improvement.

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.

© 2015 Thomson/Reuters. All rights reserved.

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