Fed to keep US interest rates at low levels

US interest rates will remain at current historically low levels for some time, the Federal Reserve Board has indicated

US interest rates will remain at current historically low levels for some time, the Federal Reserve Board has indicated.The Fed's key policy-making committee, chaired by Mr Alan Greenspan, judges that the risk of inflation falling to an undesirably low level will remain the "predominant concern for the foreseeable future".

The current policy stance "can be maintained for a considerable period", according to a statement issued after the meeting - a clear indication that interest rates will remain at current levels for some months yet.

Signs of recovery in the US economy led to much anticipation of last night's statement, which followed a scheduled meeting of the Federal Open Market Committee (FOMC), the key policy group of the US central bank. Bond interest rates have risen in recent weeks in anticipation of some pick up in growth and inflation, and analysts are debating when the Federal Reserve Board might start to raise interest rates in response.

As expected, yesterday's meeting agreed unanimously to maintain current interest rate levels. The statement clearly indicates that the Fed funds rate - the key short-term interest rate - will remain at its current low level of 1 per cent for some time, with an increase not anticipated by analysts until next year. The Fed is thought to be keen to calm the US bond market and hold down long-term interest rates to keep the recovery on track.

READ MORE

Shorter-term US bond interest rates edged lower immediately after the announcement and share prices rose modestly.

The chance of an unwelcome fall in inflation, "though minor", still outweighs the risk of an inflationary pick-up, the FOMC statement said. This shows the Fed believes the threat of a lapse into deflation, while diminishing, has not disappeared. Deflation, or a period of generally falling prices, is damaging to an economy and Fed research suggesting that the Bank of Japan could have done more to avoid deflation there is believed to remain influential.

Coincidentally, Japanese growth figures yesterday, showing that the economy grew at a much faster-than-expected annual rate of 3.2 per cent in the three months to June, will encourage hopes that a global recovery is imminent.

The Fed has cut interest rates 13 times since early 2001 , leaving the funds rate at its lowest level since 1958. With the recovery apparently under way, the market now believes that rates may have reached the bottom.

However, yesterday the Fed was cautious on economic prospects, saying that the "upside and downside risks" to attaining sustainable economic growth in the months ahead remained roughly equal. While spending was firming, the labour market signals remained mixed, and business pricing power and consumer prices remained muted.

The Fed will not increase rates until "it sees, feels and smells recovery", said Mr Colin Hunt, chief economist at Goodbody Stockbrokers. He does not expect US rates to increase until the spring, but believes when they do they could do so fairly quickly.

As euro-zone growth remains weak, short-term interest rates here are also set to remain low, although there has been some rise in longer-term rates.

This view was reflected in the US bond market after the announcement, with shorter-term yields - or interest rates - for periods such as two years, falling but longer-term yields not benefiting. This is due to fears that, while the Fed will succeed in helping to revive the economy, this might be done at a price of higher inflation - and interest rates - in the long term.