THE US Federal Reserve could keep interest rates ultra-low for even longer than investors expect if the economic outlook worsens or inflation drops, minutes from the central bank’s last meeting suggested.
The minutes of the Fed’s March 16th gathering, released yesterday, showed continued concern for the US economy’s prospects, with policymakers indicating that they were in no hurry to raise rates.
“The duration of the extended period prior to policy firming might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further,” the minutes said.
Kansas City Fed president Thomas Hoenig again dissented on this count, favouring a more flexible commitment to keep rates low “for some time”, according to the minutes, which did not elicit major market reaction.
Fed officials expressed concern on renewed weakness in housing and persistently high unemployment, saying the threat of a vicious cycle had not receded. “Participants agreed that household spending going forward was likely to remain constrained by weak labour market conditions, lower housing wealth, tight credit and modest income growth,” the minutes said.
The release of the minutes comes on the heels of a US government payrolls report showing that employers added 162,000 jobs in March. Still, the data was marked by a number of seasonal distortions, and the jobless rate remained stuck at 9.7 per cent.
Separately yesterday, Minneapolis Fed president Narayana Kocherlakota said he would be surprised if the US unemployment rate managed to dip below 8 per cent by the end of 2011. Housing starts will likely remain low, possibly for several years, he added, although the US economy could recover even without a turnaround in the housing market.
In response to the worst financial crisis in generations, the Fed not only slashed interest rates to the bone but also undertook a host of emergency measures aimed at reviving credit.
Broadly speaking, the Fed’s latest assessment of economic conditions was downbeat. The central bank characterised inflation pressures as subdued and likely to remain that way, while noting that expectations for price increases were “reasonably” well-anchored.
A few Fed members indicated they thought the risk of tightening policy too soon was greater than that of waiting too long.
Speaking to CNBC television, Richmond Fed president Jeffrey Lacker argued just the opposite.
“The risk going forward in this expansion is going to be a little more tilted towards waiting too long, and I’m going to be pretty vigilant about that,” he said.
Some investors were taken aback by the Fed’s cautious tone, given the 5.6 per cent spurt in US gross domestic product for the 2009 fourth quarter. – (Reuters)
