U.S. Fed leaves key interest rate unchanged at record low

2009-03-19 03:48:52  

·U.S. Federal Reserve announced new steps to help lift the country out of the recession. ·Its total purchases of securities will reach up to 1.25 trillion dollars this year. ·It will buy up to 300 billion dollars in long-term U.S. Treasury bonds.

    WASHINGTON, March 18 (Xinhua) -- U.S. Federal Reserve on Wednesday held a key interest rate unchanged at a record low of between zero to 0.25 percent while announcing new steps to help lift the country out of the longest recession in a quarter century.

    To provide greater support to mortgage lending and housing markets, the central bank announced it will buy up to an additional 750 billion dollars of agency mortgage-backed securities, bringing its total purchases of these securities to up to 1.25 trillion dollars this year.

    It also will increase its purchases of debt issued or guaranteed by the nation's two mortgage giants Fannie and Freddie this year by up to 100 billion dollars to a total of up to 200 billion dollars.

    Moreover, it will buy up to 300 billion dollars in long-term U.S. Treasury bonds over the next six months to help improve conditions in private credit markets.

    Doing so would help the ailing economy because many kinds of debt -- from mortgages to corporate bonds -- are linked to Treasury rates. Fed purchases could boost Treasury prices and drive down their rates. That would ripple through and lower rates on other kinds of debt.

    In addition, the Fed said that the one-trillion-dollar program created by the central bank and the Treasury Department to spur consumer and business lending could be expanded to include other financial assets.

    The program, which is rolling out this week, currently is focused on boosting lending for auto, education, credit cards and loans for business equipment.

    In a statement following a two-day long policymaking meeting, the Fed said that the U.S. economy continued to contract since last meeting in January.

    "Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending," it said.

    Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. And U.S. exports have slumped as a number of major trading partners have also fallen into recession, said the Fed.

    Still, the central bank hopes that its actions and steps taken by the Obama administration eventually will help revive the economy.

    "Although the near-term economic outlook is weak, the committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth," the Fed said.

    The Fed's decision to leave unchanged the key interest rate, which commercial banks charge each other on overnight loans, was in line with economists' expectations.

    Many economists now predict that the Fed will hold the bank lending rate, also known as federal funds rate, in this low level for the rest of this year and for most -- if not all -- of next year.

    In its statement, the Fed also said it "anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

    Like many private economists, the Fed at present does not expect inflation to become a problem. "In light of increasing economic slack here and abroad," it said, "inflation will remain subdued."

    Pushed by higher energy prices and apparel costs, consumer prices in the United States jumped 0.4 percent in February, the biggest monthly gain since last July, according to the Labor Department on Wednesday.

    The 0.4 percent gain followed an increase of 0.3 percent in January and was slightly bigger than the 0.3 percent gain that analysts had been expecting.

    Even so, few economists believe inflation will become a problem before the economy gets out of the recession, which is in its second year.

    Some economists, however, said that it's mindful of the risks of pumping more money into the economy, bailout financial institutions and leaving the key rate at a record low for too long.

    Those steps could ignite inflation, put taxpayers' money in danger and encourage companies to make high-stake gambles, they warned.

    Against this backdrop, the Fed pledged in the statement it will "continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic development."

    Wednesday's decision and announcement came three days after Fed Chairman Ben Bernanke reaffirmed that stabilizing the nation's financial system is key to turn around the economy.

    It that can be done, then the recession might end this year, setting the stage for a recovery next year, he said in a rare interview televised by CBS.

    Even in this best-case scenario, however, U.S. unemployment rate, which is now at a 25-year peak of 8.1 percent, will keep climbing. Some economists think it will hit 10 percent by the end of this year.

    And the U.S. economy, the world's largest one, is still sinking. In the fourth quarter of 2008, it contracted at an annual rate of 6.2 percent, the worst showing in a quarter century.

    Economists expect the economy to continue contracting in the first half of this year, predicting a pace between 5.5 and 6 percent or more for the first three months.