MercoPress. South Atlantic News Agency

Fed anticipates modest US growth and is prepared to provide further support

FOMC member Thomas M Hoeing is concerned about future imbalances and long term growth

Admitting that employment and output recovery has slowed down in recent months, the US Federal Reserve said on Tuesday that it is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

After its one day meeting the Federal Open Market Committee kept interest rates unchanged at 0.25% and anticipated that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period”.

The FOMC also will maintain its existing policy “of reinvesting principal payments from its securities holdings”.

The only vote against was from Thomas M. Hoenig, who judged that the US economy continues to recover at a moderate pace. Accordingly, he believes that “continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and will lead to future imbalances that undermine stable long-run growth”.

In addition, given economic and financial conditions, Mr. Hoenig did not believe that continuing to reinvest principal payments from its securities holdings was required to support the Committee’s policy objectives.

Even when the US recession officially ended in June 2009, recovery has lost momentum this year with growth at an annualised rate of 1.6% in the second three months of 2010 and unemployment at a sustained 10%.

The Fed cut key interest rates to near zero in December 2008 and later put money into the economy by buying 1.7 trillion in US government debt and mortgage bonds.

In its description of the US economy situation the FOMC said that output and employment has slowed in recent months. “Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in non-residential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months”.

Finally 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 modest in the near term”.