The Federal Reserve said on Tuesday it will keep interest rates near zero for at least another two years in a move that disappointed markets hoping for more direct action to aid the flagging economy. In a divided decision, the US central bank also signalled that it was prepared to do more if necessary, noting that it still has tools available for spurring growth and will use them if necessary.
The yield on the two-year Treasury note plunged to 0.1845 percent from 0.28 percent. US stocks were extremely volatile, seesawing on either side of unchanged, while the dollar sank to fresh session lows against the Japanese yen and a new record low against the Swiss franc. The Fed said US economic growth was proving considerably weaker than expected, suggesting inflation, which has already moderated recently, will remain contained for the foreseeable future.
Three officials, Richard Fisher of the Dallas Fed, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia, voted against the decision to pledge rock-bottom interest rates until mid-2013. It was the first triple dissent against a decision by the policy-setting Federal Open Market Committee since November 1992.
"The committee currently anticipates that economic conditions - including low rates of resource utilisation and a subdued outlook for inflation over the medium run - are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013," the Fed said. It also reiterated its policy of reinvesting the proceeds from bonds maturing in its portfolio, though it did not state a specific time frame for such actions.
One analysts said the Fed's language left open the possibility of third round of bond-buying, referred to as quantitative easing. "They certainly didn't close the door on QE3," said Michael Yoshikami, chief investment strategist at YCM Net Advisors in Walnut Creek, California.
Senior Economist Cary Leahey of Decision Economics Inc in New York said the Fed action was likely inadequate to calm markets. "The market needs a sense that the Fed is willing to do more today, rather than merely say that they're not going to tighten in mid-2012 versus 2013," Leahey added.
The Fed's decision comes with financial markets in turmoil as worries escalate about heightened risks to the global economy after an embarrassing downgrade of US debt. In addition, fears remain that European efforts to put a safety net under heavily indebted Italy and Spain may not suffice to avert wider credit market disruptions.
In an attempt to tamp down market volatility, finance ministers and central bankers of the Group of Seven major world economies issued a statement Sunday after a global telephone conference saying they were ready to act to ensure stability. Officials had been pinning hopes for an acceleration of US growth in the second half of the year on a healing of supply chain disruptions from Japan's natural disasters, a calming of debt woes in Europe as governments committed to more sustainable fiscal paths, and steady gains in business and consumer confidence in the United States.
But those expectations, along with the Fed's forecast for a growth rate of between 2.7 percent and 2.9 percent in 2011, have appeared increasingly over-optimistic in recent weeks. While there were modestly encouraging signs in hard-hit labour markets in July, the unemployment rate remained lofty at 9.1 percent. Other economic reports have pointed to weak manufacturing and sluggish consumer spending.
A Reuters poll showed analysts now see a one in four chance the US economy will slip back into recession. Two weeks ago, economists saw the chances of another recession as one-in-five. Economists also cut their forecasts for third-quarter growth to an annualised 2.3 percent from 3.1 percent in the July poll.
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