Fed vows low rates for two more years

The US Federal Reserve
© AFP Karen Bleier

WASHINGTON (AFP) – The Federal Reserve pledged Tuesday to hold interest rates near zero for two more years and said it was mulling the tools it has to boost a slowing economy.

Meeting as worries grew of a new recession, the Fed’s policy board said growth so far this year had been “considerably slower” than expected.

It maintained its key interest rate at the ultra-low level of 0-0.25 percent and vowed to keep “exceptionally low” rates “at least through mid-2013.”

“Downside risks to the economic outlook have increased,” the Federal Open Market Committee (FOMC) said after a one-day meeting.

US stock markets, hoping to sustain a rebound from Monday’s 5 percent-plus plunge, were slightly lower on the news.

The signal of a concrete period for the low rate was a shift from earlier FOMC statements, which suggested only that the rate would be held for “an extended period.”

Analysts said before the meeting that a move like that would be a signal that the Fed wants to continue stimulating the weak economy.

Meeting for the first time since its “QE2” asset purchase program ended in June, the Fed is seen as having few options to overcome stagnating growth and the growing pessimism that sent stock markets on their deepest plunge since the crisis of 2008.

The Fed said it now expects growth at a “somewhat slower pace” over the coming quarters than it had estimated in June.

But it did made no suggestion that it was considering a successor to its “QE” or “quantitative easing” program to boost the economy; only that the meeting “discussed the range of policy tools available” to promote growth.

After the economy grew at around a one percent pace in the first half, US officials are fending off suggestions of a “double-dip” recession, two years after the 19-month “Great Recession” ended in June 2009.

Goldman Sachs estimated last week that there was a one-in-three chance of returning to negative growth in the coming quarters.

That has put pressure on the Fed to adopt a new stimulus program after the expiration of the $600 billion QE2. though many doubt that more liquidity in the system will help.

In the first half of the year, the FOMC was divided between a majority who believed the economy remained soft, and a minority who believed the economy was gaining steam and faced a burst of easy money-induced inflation.

But after growth in the second quarter proved to be nearly stagnant, and inflation fell, in July Fed chairman Ben Bernanke told a congressional panel that more stimulus could be merited.

The FOMC statement Tuesday made clear the central bank is no longer concerned about inflation, predicting that it “will settle” over the coming quarters.