Fed keeps rates at record lows; upbeat on economy

WASHINGTON: The Federal Reserve has sounded a more confident note that the US economy is strengthening but pledged to hold rates at record lows to make sure it gains traction.

Wrapping up a two-day meeting on Wednesday, the Fed in a 9-1 decision retained its pledge to hold rates at historic lows for an 'extended period'. Doing so will help energise the recovery.

The Fed offered a more upbeat view even as it noted that risks remain. It said the job market is 'beginning to improve', an upgrade from its last meeting in mid-March, when it said the unemployment situation was merely 'stabilising'.

It also noted that consumer spending has 'picked up', an improvement from its last observation that spending was expanding at a 'moderate pace'.

Even with the gains, the Fed noted reasons to be cautious. High unemployment, sluggish income gains and tight credit are still dampening consumer spending, a major contributor to economic activity.

Commercial real estate remains fragile. And though housing activity has edged up, it is still at depressed levels. Bank lending continues to shrink.

The Fed's statement included nothing that would lead most economists to move up their forecasts for when the central bank will start raising rates.

The soonest the Fed will do so is the fourth quarter, 34 of 44 leading economists polled told The Associated Press.

'The Fed did upgrade its assessment of the economy, but clearly there is too much headwind for the recovery' for the Fed to signal any plans to boost rates, said economist Sung Won Sohn at California State University.

Kansas City Fed chief Thomas Hoenig was, for the third straight meeting, the sole member to dissent from the overall decision to keep the 'extended period' pledge. He worries that this will limit the Fed's stated 'flexibility' to start modestly bumping up rates.

He fears keeping rates too low for too long could lead to excessive risk-taking by investors, feeding new speculative bubbles in stocks, bonds and commodities.

The Fed's brighter assessment helped give a modest lift to stocks. The Dow Jones industrials gained about 53 points, a rise of 0.48 per cent, on Wednesday.

The Fed has held its target range for its bank lending rate at between zero and 0.25 per cent, where it has remained since December 2008. In response, commercial banks' prime lending rate, used to peg rates on certain credit cards and consumer loans, has stayed at about 3.25 per cent - its lowest point in decades.

Nonetheless, signals are growing that the US economy has turned a corner. Employers added a net total of 162,000 jobs in March, the most in three years. Consumer confidence is rising and manufacturers are boosting production.

Source: Straits Times, 30 Apr 2010