Fed holds key rate at 1%


  • Business
  • Thursday, 18 Sep 2003

WASHINGTON: As widely expected, the Federal Reserve has opted to keep US interest rates at 45-year lows, and said they would stay down for a long time to lift an economy that is losing jobs. 

In announcing their unanimous decision to leave the benchmark federal funds rate at a 1958 low of 1%, Fed policy-makers repeated a warning that already low inflation could move disturbingly lower. 

“The risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future,” the policy-setting Federal Open Market Committee said after its latest meeting on Tuesday. “In these circumstances, the committee believes that policy accommodation can be maintained for a considerable period.” 

Fed officials are concerned that relatively high unemployment and unused production capacity could slow inflation and sap some of the stimulus that low rates offer. 

Some have argued that a stable and positive rate of inflation is the best buffer against the risk of deflation, a persistent and potentially crippling drop in consumer prices. 

Numerous signs have emerged suggesting the pace of US recovery has quickened appreciably of late, lessening deflation risks, but economists say the Fed is far from expressing glee. 

“The biggest surprise was that the tenor of the statement did not change much at all,” said Chris Low, chief economist at FTN Financial in New York. “The Fed is making it clear it is not bothered by strong growth and there is no intention of raising rates.” 

The Fed’s latest announcement matched nearly word-for-word a statement issued after its last meeting in August. However, while it described labour market indicators as “mixed” a month ago, it noted this time the economy was losing jobs. 

Since the US economy turned down in March 2001, 2.8 million Americans have lost their jobs. Even in August, 21 months after the recession ended, the economy shed 93,000 jobs. 

Economists say the failure to create jobs keeps alive the risk that growth could falter once a boost from tax cuts fades. 

While most economists expect the next move in interest rates to be higher, eventually, some said the Fed’s language suggested a further rate cut was not yet out of question. 

“Our forecast is for the next move to be a tightening, but I continue to believe that there’s still a one-in-three chance that the next move by the Fed is an easing,” said Cary Leahey, senior US economist of Deutsche Bank Securities in New York. “The probability of an easing has gone up after this meeting.” 

Even before Tuesday’s meeting, there was considerable debate on when the central bank might begin bumping rates up, and economists said the Fed’s statement hammered home the view that any rate hike was still some way off. – Reuters  

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