The Federal Reserve yesterday voiced growing optimism on the US economy as job losses slow, but repeated a vow to keep interest rates unusually low for "an extended period."
In a unanimous decision, the US central bank left benchmark overnight rates on hold in a zero to 0.25 per cent range, as widely expected.
Underscoring the economy's recovery, the Fed in a post-meeting statement highlighted improvement in the battered housing sector and noted last month's decline in the unemployment rate.
"Economic activity has continued to pick up," the Fed said at the conclusion of a two-day meeting. "Deterioration in the labour market is abating."
Underscoring improving conditions for banks, the Fed said it would stand by plans to shutter most of its emergency lending facilities on February 1st, showing growing confidence that credit markets could stand on their own.
The US economy returned to growth in the third quarter, expanding at a 2.8 per cent annual rate, signalling the end of the most severe recession since the 1930s.
"They recognise growth prospects are brighter," said Anna Piretti, senior economist at BNP Paribas. "This is the first step in removing the policy stimulus, but it doesn't mean they are about to raise rates."
US stocks briefly moved higher after the decision as investors welcomed the Fed's acknowledgment of a rebounding economy, but the gains proved fleeting in a nervous market. Stocks, bonds and the US dollar ended the day little changed.
The Fed cut benchmark interest rates close to zero a year ago and has undertaken a host of emergency measures to pump more than $1 trillion into the economy to combat the worst financial crisis in generations.
In November, the Fed said it would make adjustments to its lending facilities as warranted, holding open the possibility they could be ramped up if needed. It dropped that phrase on Wednesday.
With the economy expanding, investors are wondering when and how quickly the Fed will begin to wind down its monetary support. That day of reckoning, dreaded by many in financial markets, appeared a small step closer, given the central bank's increasingly upbeat tone.
A string of recent reports has shown the recovery gathering strength. Industrial production and consumer spending, which slumped when credit markets seized in late 2008, are on the rise, and the pace of job losses has slowed sharply.
Still, the Fed made clear it was in no rush to tighten borrowing conditions either, given the lack of an immediate inflation threat in the face of high unemployment.
In November, the jobless rate edged down to 10 per cent, just off a 26.5 year high, but Fed officials expect it to remain above 9 per cent at least through the end of next year.
Inflation, meanwhile, seems largely contained. The Labour Department said yesterday consumer prices rose 0.4 per cent in November, pushing the 12-month gain into positive territory for the first time since February. But prices outside of food and energy were flat on the month.
Reuters