Fed to keep interest rates near zero for next 2 yrs

Painting a gloomy picture of the American economy and warning that it will remain weak for quite some time in the future, the US Federal Reserve on Tuesday decided to keep interest rates near zero per cent for the next two years.

“To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the committee decided today to keep the target range for the federal funds rate at 0 to 1/4 per cent,” the Federal Open Market Committee (FMOC) of the Federal Reserve said.

“The committee currently anticipates that economic conditions — including low rates of resource utilisation and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013,” the FMOC said in a statement.

The decision of the committee, however, was not unanimous.

While the Federal Reserve Board Chairman, Mr Ben S. Bernanke, and his deputy, Mr William C. Dudley, along with five others, voted in its favour; three others, including Indian American Mr Narayan Kocherlakota, voted against the FMOC action.

Coming in the wake of the downgrade of the US credit rating from AAA to AA+ by Standards and Poor’s, the FMOC said it now expects a somewhat slower pace of recovery over the coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually towards levels that the committee judges to be consistent with its dual mandate.

“Moreover, downside risks to the economic outlook have increased. The committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further,” it said.

The committee said indicators suggest a deterioration in the overall labour market conditions in recent months and the unemployment rate has moved up.

Household spending has flattened out, investment in non-residential structures is still weak and the housing sector remains depressed, it said.

“However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending, as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity,” the FMOC said.

“Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as the prices of energy and some commodities have declined from their earlier peaks. Longer term inflation expectations have remained stable,” it said.