MercoPress. South Atlantic News Agency

Fed leaves rates unchanged and admits businesses are still “cutting back”

Fed Reserve chairman Ben Bernanke

The Federal Reserve Open Market Committee kept US interest rates on hold at between 0% and 0.25%, as had been widely expected. Despite the US economy growing 3.5% in July to September - its first expansion since June 2008 - rates were left unchanged on Wednesday to further aid the recovery.

“The Committee will maintain the target range for the federal funds rate at 0 to 0.25% and 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”, said the FOMC release.

FOMC also anticipated support to mortgage lending and housing markets and to improve overall conditions in private credit markets by purchasing a total of 1.25 trillion US dollars of agency mortgage-backed securities and about 175 billion USD of agency debt.

“The amount of agency debt purchases, while somewhat less than the previously announced maximum of 200 billion USD, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010”.

The Federal Reserve based it decision on information suggesting that economic activity has continued to pick up even when conditions in financial markets were roughly unchanged, on balance, over the inter-meeting period.

“Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales”.

However although economic activity is likely to remain weak for a time, “the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability”.

Finally regarding inflation prospects FMOC believes that with substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, “the Committee expects that inflation will remain subdued for some time”.

Nevertheless private analysts have cautioned that the US economic expansion of the third quarter was basically helped by President Obama’s 787 billion US dollars stimulus plan, and there are fears that growth will slow significantly when the impetus dies out.

This added to the fact that US unemployment remains a concern since the jobless rate has risen to 9.8% in September, a 26-year high. Precisely the FOMC release points out that “businesses are still cutting back on fixed investment and staffing, though at a slower pace”.