News Column

Federal Reserve Stays Course

January 31, 2013

Frank Fuhrig

Federal Reserve

The US Federal Reserve left interest rates near zero and maintained its injection of cash into the financial system, even after Wednesday's unexpected report of stalled economic growth to end 2012.

The central bank said in a statement following its regular meeting that "growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors." Inflation expectations remain low and "stable."

The Federal Reserve said it expects to leave interest rates at historic lows for "a considerable time."

The bank said it would continue monthly purchases of 85 billion dollars in government bonds, intended to force investors to put their money into the private economy and "maintain downward pressure" on long-term interest rates.

US unemployment remained 7.8 per cent in December.

"Employment has continued to expand at a moderate pace but the unemployment rate remains elevated," the bank said.

The economy contracted by an annualized 0.1 per cent in the fourth quarter of 2012 following 3.1-per-cent growth in the third quarter, the Commerce Department's Bureau of Economic Analysis said.

The fourth-quarter decline reflected a steep drop in defence spending in the period.

It was the first quarterly decline in gross domestic product (GDP) since the second quarter of 2009, when the US economy came out of the worst downturn in 80 years.

Wall Street economists had expected the economy to grow during the quarter.

White House spokesman Jay Carney said there was "more work to do, and our economy is facing a major headwind."

For the year, US GDP was up 1.5 per cent.

The central bank reiterated its position that the "exceptionally low" current target of 0 to 0.25 per cent for its benchmark federal funds rate would be maintained while the jobless rate was above 6.5 per cent, unless inflation pressures arise.

The bank also repeated its prediction of inflation remaining "at or below" 2 per cent in coming years.

The Federal Reserve said it plans to continue buying 40 billion dollars of mortgage-backed securities and 45 billion dollars of Treasury bonds every month until the labour market improves "substantially," barring inflation.

"Although strains in global financial markets have eased somewhat, (the bank) continues to see downside risks to the economic outlook," the statement said.

The central bank's policy-setting Open Market Committee voted 11-1 for Wednesday's continuation of existing policy. The lone dissenter voiced concerns that long-term loose monetary policy could fuel speculative bubbles in financial markets and stoke future inflation, according to the committee's statement following a two-day meeting.

Source: Copyright 2013 dpa Deutsche Presse-Agentur GmbH

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