News Column

Fed's Moves Indicate No Major Changes Foreseen in Economy

July 1, 2009

Isaac Cohen for

federal reserve, analysis

The U.S. central bank, known as the Federal Reserve, decided last week to leave monetary policy unchanged. As it was widely anticipated, the federal funds interest rate, at which banks lend to each other overnight, was kept as it was, within a range of zero to 0.25 percent. The usually brief communique stated, as it did in March, that this key interest rate will remain at these "exceptionally low levels ... for an extended period." This indicates that the central bank does not anticipate, in the immediate future, major changes in economic conditions.

Additionally, despite recent increases in energy and other commodity prices, the Federal Reserve "expects that inflation will remain subdued for some time," because "substantial resource slack is likely to dampen cost pressures."

The central bank also recognized that "the pace of economic contraction is slowing," as evidenced by recent improvement in financial markets and signs of stability in household spending. However, private consumption remains constrained by job losses, lower housing wealth and tight credit.

Finally, to improve overall conditions in private credit markets, the Federal Reserve will continue injecting liquidity through the purchase of mortgage-backed securities, debt from government-controlled mortgage agencies and Treasury securities.

Briefly, the central bank recognized the contraction of the U.S. economy continues, but at a slower pace, with no inflationary pressures in sight. For these reasons, the accommodative monetary policy stance was left unchanged.

Isaac Cohen is the former director of the Washington Office of the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). He is a commentator on economic and financial issues for CNN en Espanol TV and radio.

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Source: (c) 2009. All rights reserved.

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