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International News>Fed to hold rates low for 'extended' period- AP |
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THE UNITED States Federal Reserve pledged Wednesday to keep a key interest rate at a record low for an "extended period", signalling that the weak economy remains dependent on government help to grow.
The Fed said economic activity has "continued to pick up" and that the housing market has streng-thened - a key ingredient for a sustained recovery.
But Fed chairman Ben Bernanke and his colleagues warned that rising joblessness and tight credit for many people and companies could restrain the rebound in the months ahead.
"Economic activity is likely to remain weak for a time," they said.
Against that backdrop, the Fed kept the target range for its bank lending rate at zero to 0.25 per cent. And it made no major changes to a programme to help drive down mortgage rates.
Steady credit card rates
Commercial banks' prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will remain about 3.25 per cent, the lowest in decades.
Still, some credit card rates have risen over the past several months. In part, that reflects rate increases by lenders in response to escalating defaults on credit card loans.
Lenders also pushed through increases before a new law clamping down on sudden rate hikes for credit card customers takes effect early next year.
The average rate nationwide on a variable-rate credit card is 11.5 per cent, according to bankrate.com.
Lenders charge more and credit card customers pay rates higher than the prime because the debt they run up is riskier.
Most analysts don't think the Fed would begin to boost rates until next spring or summer.
Fed policymakers "believe they need to keep rates low to ensure that the recovery doesn't falter," said Joel Naroff of Naroff Economic Advisors.
The central bank hopes low rates will encourage consumers and businesses to boost spending, which would invigorate the recovery. The Fed signalled that it can continue to hold rates low because inflation is all but nonexistent.
The Fed has now entered a new phase: Managing the recovery rather than fighting the worst recession and financial crisis to hit the country since the Great Depression.
Uncertain staying power
The economy began growing again last quarter for the first time in more than a year. But much of that growth came from govern-ment-supported spending on homes and cars. The strength and staying power of the recovery are uncertain, especially once Govern-ment supports are removed.
In such a fragile recovery, a rate increase by the Fed is unlikely any time soon, said Chris Rupkey, an economist at the Bank of Tokyo-Mitsubishi.
"Growth does not mean a rate hike," Rupkey said.
As with past rebounds, the budding recovery won't likely stop the unemployment rate from rising. The rate, now at a 26-year high of 9.8 per cent, is expected to hit 9.9 per cent today, when the government releases the unemployment report for October. The jobless rate could rise as high as 10.5 per cent around the middle of next year before declining, analysts said.
Trimming purchases
Though it did not change a programme to help drive down mortgage rates, the Fed did say it will trim its purchases of debt from Fannie Mae and Freddie Mac to US$175 billion, from US$200 billion, because the supply of that debt has declined.
At its previous meeting in late September, the Fed agreed to slow the pace of a US$1.25 trillion programme to buy mortgage securities from Fannie Mae and Freddie Mac. It decided to wrap up the purchases by the end of March instead of at year end. So far, the Fed has bought US$776 billion of the mortgage securities.
Its efforts to lower mortgage rates are paying off. Rates on 30-year loans averaged 5.03 per cent, Freddie Mac reported last week. That's down from 6.46 per cent last year.
Though the Fed will slow its purchases of mortgage securities, rates for home loans should remain low - in the 5.0 per cent range - as long as the purchases continue, analysts say.
- AP