MercoPress. South Atlantic News Agency

US Central bank anticipates low rates for an “extended period”

Thomas M. Hoeing, the only dissenting voice

Two days ahead of the Toronto G-20 summit the US Federal Reserve anticipates it will keep its main interest rate at a near zero level, for an “extended period”. The Federal Open Market Committee said on Wednesday that “subdued inflation” and other factors “are likely to warrant” keeping rates at their historic lows.

“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 official release..

However the FOMC description of the current situation was ambiguous: although information received suggests that the economic recovery is proceeding and that the labour market is improving gradually, household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit”.

Furthermore business spending on equipment and software has risen significantly but investment in non-residential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months.

Nonetheless, the FOMC “anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time”.

The only vote against the Wednesday release was from Thomas M. Hoeing who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because “it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly”.