US Fed leaves rates alone

  • Business
  • Thursday, 14 Aug 2003

WASHINGTON: Federal Reserve policy-makers, as widely expected, have opted to keep US interest rates at 45-year lows, but have again warned of the risks of falling prices and said rates could stay low for “a considerable period”. 

The US central bank’s policy-setting Federal Open Market Committee (FOMC) left the bellwether federal funds rate for overnight loans between banks at 1% after its meeting on Tuesday. That is a 1958 low hit after the Fed cut rates in June for a 13th time since early 2001 to try to foster more vigorous economic expansion. 

The Fed carefully couched its assessment of US economic prospects, noting some signs of improvement but concluding that the risks were about equal for a pick-up or a downturn, just as they were in June. “The evidence accumulated over the inter-meeting period shows that spending is firming, although labour market indicators are mixed,” it said. 

The policy-makers repeated that a small risk of an unwelcome fall in inflation exceeded chances of a sharp climb in prices and said their main concern “for the foreseeable future” was the potential for “undesirably low” inflation. 

“In these circumstances, the committee believes that policy accommodation can be maintained for a considerable period,” the Fed said in a post-meeting statement that clearly stated it would do its best to keep credit cheap until growth perks up. 

Analysts praised the Fed for being explicit about its policy intent this time, in contrast to the statement at the close of its previous meeting on June 25 that created initial confusion about the extent of worry over falling prices. 

“The Fed sounded just the right note,” said economist Parul Jain of Nomura Securities in New York. 

The Fed’s steady-as-she-goes course heartened stock investors, fuelling a 92.71-point surge in the Dow Jones Industrial Average to a close of 9,310.06. The high-tech heavy Nasdaq Composite Index also rose, adding 25.5 points to end at 1,687.01. 

Bonds weakened, though, with the 30-year US Treasury bond price plunging 16/32 point, raising the yield to 5.53%, while the 10-year Treasury note price fell 18/32 of a point, raising the yield to 4.43% after the Fed erased any doubt it would keep short rates down. 

Wall Street appeared to get the message this time that rates would stay low, and for a long time. 

A Reuters poll of 21 primary bond dealers conducted after the Fed decision was published found 18 expected the next rate change would be up, sometime later next year or even in 2005.  

A minority group of three foresaw one more rate cut. 

The FOMC vote to keep rates unchanged was unanimous. – Reuters 

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