Fed pledges to keep rates low

Fed Chairman Ben Bernanke

The U.S. Federal Reserve on Wednesday expressed growing confidence that an economic recovery was building, even though it stuck to its commitment to keep borrowing costs near zero for “an extended period."

In a unanimous vote, the Fed's policy-setting Federal Open Market Committee decided to keep its benchmark federal funds rate unchanged in a range of zero to 0.25 per cent, as expected.

It said the economy had “continued to pick up" since its last meeting in September, but expressed concern that the economy's recovery was likely to be sluggish.

“Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit," the U.S. central bank said in a statement outlining its decision.

The Fed also said it would buy about $175-billion (U.S.) of debt issued by government-backed mortgage finance agencies, less than the $200-billion maximum it had originally allotted, citing limited availability.

U.S. stocks briefly pared gains, while prices for U.S. government debt fell sharply on the announcement. The U.S. dollar extended losses against the euro.

“I would say there are no surprises at all. If there is any surprise, it sounds like there is not even any hint that they are going to raise rates soon," said Robert MacIntosh, chief economist at Eaton Vance Corp in Boston. “We've got a number of Fed meetings to go before we will get any kind of increase."

The Fed's closely watched policy statement was somewhat more upbeat than its statement in September, which had referred to spending as “stabilizing."

However, it was also more explicit about why it expects to be able to keep overnight rates, which it cut close to zero in December, exceptionally low for a long time, citing “low rates of resource utilization, subdued inflation trends, and stable inflation expectations."

The central bank, wary of undercutting the fragile recovery by withdrawing its support too soon, has also been on guard for any indication that its emergency lending efforts could fuel an unwelcome bout of inflation down the road.

But top Fed officials, including Chairman Ben Bernanke, have said the U.S. recession, the most painful since the 1930s, has left a legacy of high unemployment and idle factories that should keep price pressures in check.

A private report on Wednesday showing U.S. companies cut payrolls at the slowest pace in more than a year may add to a sense that the economic numbers are moving in the right direction. For details, see.

However, while the government on Friday is expected to report that the drop in employment is abating, the jobless rate is forecast to rise to a fresh 26-year high of 9.9 per cent.

The world's largest economy grew at a faster-than-expected 3.5 per cent annual rate in the third quarter, which effectively signalled the end of the downturn.

Suggesting further momentum, data on Monday showed manufacturing activity hit its highest level in 3-1/2 years last month, though a report on Wednesday showed the nation's vast services sector was growing only modestly.

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