MercoPress. South Atlantic News Agency

Fed pledges to keep exceptional “low interest rates”

The United States Federal Reserve pledged to keep interest rates at “exceptionally low levels,” and use “all available tools” to promote the resumption of sustainable economic growth, as it warned that the outlook for the world's largest economy has weakened further in recent weeks.

In a statement issued on Wednesday after its regular rate-setting meeting, the Fed said it would leave interest rates unchanged at their historical low of 0 to 0.25% and pointed to evidence that the economic outlook is still deteriorating. "The Federal Open Market Committee, FOMC, continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time". "Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly," it said. The FOMC release said the Fed "will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability", underlining that "the focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level". More over the Federal Reserve "continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant". However the Fed said that it was not ready to take the more radical step advocated by many economists of buying government bonds outright to pump more cash into banks - but it could do so, if it thought such measures would be, "particularly effective in improving conditions in private credit markets". One member of the Fed's decision-making committee, Jeffrey Lacker, vote for the Fed to start buying Treasury bills immediately. "The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets". It also announced it will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. "FOMC will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability". On inflation FOMC said that in light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, it expects inflation pressures to remain subdued in coming quarters, but there's also the risk "that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term". On the bright side the Fed estimates that conditions in some financial markets "have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions", nevertheless, credit conditions for households and firms remain extremely tight. Finally FOMC anticipates that "a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant". Share prices on Wall Street soared, as investors welcomed the Fed's renewed commitment to tackling recession, and the US House of Representatives prepared to pass President Obama's ambitious 825 billion dollars economic rescue plan. Although the Fed has exhausted its conventional ammunition of interest rate cuts, it is enacting a series of unconventional measures to drive down interest rates across the economy.