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Last updated: April 28, 2010 8:27 pm
The Federal Reserve pledged on Wednesday to keep interest rates low for an “extended period” as it offered only a modest upgrade to its outlook for the US economy.
At the end of a two-day meeting, the federal open market committee issued a statement almost identical to its previous one, in March, reiterating that the main US interest rate would remain at its current target range of 0-0.25 per cent, where it has stood since December 2008.
Any signal of a faster move to tighter monetary policy could have added to the market turmoil created by the European sovereign debt crisis. After the statement, equities and Treasury yields edged higher, while the dollar eased.
“The Fed today gave no hint that policy tightening is anywhere on the visible horizon,” said Michael Feroli at JPMorgan.
The FOMC statement came on the eve of Thursday’s planned announcement by Barack Obama, US president, that he intends to nominate Janet Yellen, president of the San Francisco Fed, to replace Don Kohn, the outgoing vice-chairman. Mr Obama is also expected to fill two additional vacancies on the seven-member Fed board of governors with Sarah Raskin, a state banking regulator in Maryland, and Peter Diamond, an economist at the Massachusetts Institute of Technology who has written extensively on US social security policy.
Despite a wave of encouraging economic indicators in recent weeks, Fed officials this week made only minor positive changes to their description of the recovery, highlighting how cautious they are about its sustainability.
While Ben Bernanke, Fed chairman, and others have noted that the risks of a “double dip” recession have receded, there is also little comfort that the chances of a much stronger V-shaped recovery have increased.
The FOMC said “economic activity has continued to strengthen” since March, noting the labour market was “beginning to improve” – a more optimistic assessment than its description last month of a “stabilising” labour market.
However, it repeated its assertion that employers remained reluctant to hire new workers.
Officials acknowledged a recent jump in new construction but said it remained at depressed levels. Consumer spending had “picked up” but was still suffering because of factors including high unemployment and tight credit.
Policymakers have been treading a careful line between insisting that the Fed is ready to tighten monetary policy to fight inflation once the recovery is fully entrenched, and damping expectations of a quick rise in rates that could stifle activity.
But in recent months inflationary pressures have actually eased, reducing the ammunition for more hawkish members of the FOMC.
Additional reporting by Michael Mackenzie in New York
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