Pace of US recovery faltering: Fed

It vows to maintain low interest rates for extended period

WASHINGTON: The United States Federal Reserve acknowledged a faltering pace of economic recovery as it renewed its vow to hold benchmark interest rates markedly low for an extended period.

In a statement at the end of a two-day meeting on Wednesday, the Fed scaled back its assessment of the pace of recovery, taking note of pockets of weakness, and also issued a cautionary note about volatile financial markets in the light of Europe's debt woes.

But it stuck to its expectation that the economy will continue to gradually emerge from the worst recession in decades.

'Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad,' the central bank said in a statement.

As expected, the Fed held overnight rates in the zero to 0.25 per cent range set in December 2008.

Dr Cary Leahey, an economist at Decision Economics, said: 'In early May, a substantial minority of analysts were looking for the Fed to alter the language on extended period in June to prepare for an August rate hike. All that has gone out the window.'

Kansas City Federal Reserve Bank president Thomas Hoenig dissented for the fourth consecutive meeting, arguing that the Fed's promise to hold rates ultra-low for a long time risks perpetuating a boom and bust cycle.

The Fed said the economic recovery was 'proceeding', a downgrade from its assessment in April, when it said the economy had continued to strengthen.

Policymakers nodded to a slowdown that has become evident in housing. In April, they had noted that housing starts had 'edged up', but on Wednesday, they said only that starts 'remain at a depressed level'.

The central bank also tempered its view of consumer spending, saying it was 'increasing, but remains constrained by high unemployment, modest income growth and lower housing wealth'. In April, it said spending had picked up.

The Fed also noted a recent softening of inflation. It cited a decline in energy and other commodity prices, and said underlying inflation had trended lower.

Recent disappointing job and housing market reports, financial turmoil in Europe and a four-decade low in a key inflation metric have raised doubts about the outlook, prompting some analysts to push back Fed rate hike forecasts.

While most economists think a rate increase will still be the next step, some have suggested the Fed should consider additional ways to spur growth and lending.

But the Fed offered no hints it plans any such move.

A report on Wednesday showing a record low in sales of new single-family homes last month dealt a clear setback to hopes for a speedy pick-up in growth.

Fed chairman Ben Bernanke told a congressional panel earlier this month he expects the US economy to expand at a 3 per cent annualised rate this year and gain steam next year.

Still, he cautioned that 'a significant amount of time' would be needed to restore the jobs lost.

REUTERS

Source: Straits Times, 25 Jun 2010