Wednesday June 24, 08:16 PM
Fed keeps near-zero rates, sees gradual rebound
By Rob Lever
WASHINGTON (AFP) - The Federal Reserve Wednesday maintained its aggressive effort to lift the US economy out of recession, holding its base rate near zero, as it predicted a "gradual" rebound without inflation.
Concluding a two-day meeting, the policymaking Federal Open Market Committee, as widely expected, left the base federal funds rate in a range of zero to 0.25 percent.
The FOMC statement, which was similar to the one issued on April 29, said the economy remained weak but was showing signs of improvement.
"Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing," the panel said.
"Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability."
Dismissing the notion that its stimulus effort would spark inflationary pressures, the panel said it expects "that inflation will remain subdued for some time."
On the economic outlook, the FOMC said that "conditions in financial markets have generally improved in recent months."
The FOMC voted unanimously to maintain its base rate and said that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
Analysts said the Fed was holding to its aggressive course to stimulate the recession-bound economy despite the growing notion of "green shoots."
"They are trying to communicate they will keep doing what they have been doing," said Josh Feinman, chief economist at Deutche Bank's DB Advisors.
"They're not about to stop just because the patient is starting to come out of a coma. They want to see the patient up and on his feet before they take him off life support."
The US economy declined by 5.7 percent in the first quarter of this year after a 6.1 percent contraction in the last quarter of 2008.
Based on latest projections by the Fed, the economy will contract between 1.3 and 2.0 percent in 2009.
The Fed offered no indication it would ramp up or scale back its effort to pump more liquidity into the financial system, an effort that began with a pledge this year to buy up more than one trillion dollars in US government and agency securities in an effort to push down interest rates.
"The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets," the statement said.
"The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted."
The Fed "made few changes to its postmeeting statement, which keeps its options open," said Ryan Sweet at Moody's Economy.com.
"The Fed doesn't want to show all its cards or unnecessarily commit to purchasing additional assets to bring down long-term Treasury and mortgage rates."
Adolfo Laurenti, economist at Mesirow Financial, said there may have been some disappointment that that Fed did not do more to explain its so-called "exit strategy."
"They did not address an exit strategy but I think they feel an exit strategy is implicit in their message," he said.
"I think they are doing the right thing for the current economic conditions. There is still a lot of volatility, a lot of uncertainty."
But Laurenti said that the Fed will have to prepare to shift course when the economy begins to grow to avert an inflationary spiral.
"The risk of inflating a new bubble is real," he said
"I hope they will be much more aggressive than they were in 2004 (in raising rates). It's always easy to be aggressive in cutting rates but it's harder to be aggressive in raising them. But we will have to get back to normalization of rates."
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