Fed to wait for labour market before tightening
November 6, 2009
By Scott Lanman Washington
A return to economic growth alone would not warrant higher interest rates, US Federal Reserve officials signalled yesterday, saying an increase would instead depend on when the labour market and inflation picked up.
On Wednesday the Fed's rate-setting Open Market Committee restated its pledge to keep rates "exceptionally low" for an "extended period". For the first time, the panel said its commitment depended on "low rates of resource utilisation, subdued inflation trends and stable inflation expectations".
The comments prompted traders to reduce bets for an increase in borrowing costs in the first half of next year, given that policymakers are focused on reducing unemployment.
"There are still many downside risks to the recovery," said Chris Rupkey, the chief financial economist at Bank of Tokyo- Mitsubishi. "The Fed looks to be on hold for longer than I thought", possibly beyond the second quarter, he said.
Policymakers, acting the week after a report showed the US economy expanded in the third quarter for the first time in more than a year, left their target for the overnight interbank lending rate unchanged at a range of zero to 0.25 percent. The vote was unanimous.
This "put some meat on the bones" of the Fed's rate stance, said Wells Fargo Securities chief economist John Silvia.
"The Fed is simply trying to set up conditions or parameters for the continuation of the current easy policy, so that it's not unlimited with no boundaries," said Silvia, who previously worked as a senior economist in Congress. Silvia did not change his forecast for the Fed to lift interest rates after July.
The greenback weakened after the decision, falling the most against the euro since September 8.
US employers probably reduced payrolls by 175 000 in October, according to the median forecast in a survey ahead of an employment report today. Unemployment was expected to rise to 9.9 percent from 9.8 percent.
Consumer prices fell on an annual basis for seven months in the longest such decline since 1955. The consumer price index fell 1.3 percent in the year to September. Excluding food and energy, prices rose at a 1.5 percent annual rate.
While some measures of inflation expectations have been rising, the Fed said longer-term expectations were stable and reiterated that price increases "will remain subdued for some time".
The ebb of the global crisis has already helped spur central banks from Australia to Norway to start increasing borrowing costs. Wednesday's unanimous statement indicated the Fed was not ready to follow some of its counterparts abroad.
"We are nowhere near there," said Michael Holland, the chairman of Holland & Co. "We don't have anything approaching the position where they can start unwinding."
Wednesday's statement said the central bank would purchase a total of $1.25 trillion (R9.69 trillion) of agency mortgage-backed securities and about $175 billion of agency debt in the first quarter of next year.
Previously, the Fed said it would buy as much as $200bn of debt issued by Fannie Mae, Freddie Mac and the government-chartered Federal Home Loan Banks. The Fed said the change was "consistent with the recent path of purchases and reflects the limited availability" of the notes. - Bloomberg
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