Fed to Keep Rates "Exceptionally Low"
The US Federal Reserve plans to keep interest rates "exceptionally low" in response to the recent slowdown in the US economic recovery.
By Gabe Kahn.
First Publish: 8/9/2011, 10:34 PM
The US Federal Reserve plans to keep interest rates "exceptionally low" until at least mid-2013, the central bank announced Tuesday in response to a recent slowdown in the US economic recovery.
For months, the Federal Reserve has been ambiguous on its timeframe, indicating it would keep its federal funds rate near zero for an "extended period," to help stimulate the economy.
The federal funds rate is the central bank's key tool to spur the economy and a low rate is thought to encourage spending by making it cheaper to borrow money.
Following its fifth major policymaking meeting of the year, the central bank acknowledged that economic growth in the United States is "considerably slower" than expected. That marks a change from prior statements, when the Fed had said the recovery was chugging along at a "moderate pace."
"Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected," the official Fed statement said.
Critics have pointed out that there's little the Fed can do to tame volatile financial markets after Standard & Poor's downgraded the country's credit rating Friday. Having exhausted most of its traditional tools, the Fed also has few remaining options to try to prop up the sluggish economy and job market, many say.
But the Fed indicated it is considering a "range of policy tools available to promote a stronger economic recovery," and "is prepared to employ these tools as appropriate." This language was much stronger than in June, when the Fed seemed to take a more passive stance, saying it would "monitor the economic outlook" and "act as needed."
In June, the Fed completed a $600 billion stimulus effort known as the second round of quantitative easing, or QE2. That policy is widely credited with supporting stocks earlier this year, but is also blamed for driving oil and gasoline prices higher -- an effect that spurred inflation and hurt U.S. consumer spending.
Some Fed members still fear that more monetary stimulus could drive inflation higher. But on the other hand, without stimulus, economists say the U.S. economy may risk falling into another recession.
At its prior meeting in June, the Federal Reserve cut its forecasts for U.S. economic growth to between 2.7% and 2.9% for the year overall