Federal Reserve to keep rates frozen for 'extended period'

THE FEDERAL Reserve kept US monetary policy frozen yesterday as it awaits a clear outcome to the fiscal crisis in Europe.

The federal funds rate will remain in its current range of 0-0.25 per cent and the Fed’s open market committee repeated its statement that economic conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period”.

A widespread interpretation of “extended period” is that the Fed will keep rates in their current range for at least another six months.

Many forecasters now think the Fed will not raise rates until the second half of next year.

In a statement little changed since April, the FOMC avoided explicitly mentioning Europe, saying instead that “financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad”.

The Fed’s caution, after it made steadily more upbeat statements earlier this year, highlights the impact that Europe’s fiscal woes have had on monetary policymakers around the world.

Observers see little concern about the effect on US exports of the weaker euro or a fall in European demand.

But there are fears about the outside chance that the European crisis could escalate into something that damages banks and creates renewed turmoil in financial markets. “There’s a big difference between the most likely outcome and the cost of being wrong,” said Neal Soss, chief economist at Credit Suisse in New York, before the FOMC’s announcement.

In its statement the Fed said that “economic recovery is proceeding and the labour market is improving gradually”.

It changed its language on housing investment to be slightly weaker.

** A split has emerged in the Bank of England’s monetary policy committee over the seriousness of the threat from inflation, after one member unexpectedly voted to withdraw some monetary stimulus at its last meeting.

– (Copyright The Financial Times Limited 2010)