Fed panel to buy $1.45 trillion in mortgage-related debt
Alister Bull and Mark Felsenthal
Province
U.S. central bankers met at Washington’s Federal Reserve building yesterday to decide on fiscal policies and interest rates. Photograph by: Reuters
The Federal Reserve yesterday held monetary policy steady and said the U.S. economic recession was easing, as it signalled its worries over a possible troubling downward spiral in prices were fading.
Concluding a two-day meeting, the U.S. central bank said it had decided to hold overnight interest rates in a zero-to-0.25-per-cent range — the level reached in December — and repeated that they would likely stay unusually low for some time.
With the benchmark interbank lending rate virtually at zero, the Fed has focused on driving down other borrowing costs by buying mortgage-related debt and U.S. government bonds.
In a statement, the Fed’s policy-setting panel said it would hold to a previous pledge to buy $1.45 trillion US in mortgage-related debt by year-end and $300 billion in longer-term U.S. government debt by autumn, a decision financial markets had expected.
“Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing,” the Fed said. “Conditions in financial markets have generally improved in recent months.”
U.S. stock prices slipped after the statement, with the blue-chip Dow Jones industrial average falling into negative territory, while the value of the U.S. dollar rose and prices for U.S. Treasury debt dropped.
“It came out exactly as we expected it to. It was certainly more subtle than many had hoped for but nonetheless delivered a clear message that inflation and the economy will remain subdued for some time,” said Michael Woolfolk, senior currency strategist at The Bank of New York-Mellon in New York.
The central bank dropped a phrase it had used in its last statement in April in which it warned inflation could run below desired levels for a time — a suggestion officials were worried about a broad-based deflation.
While appearing more comfortable on deflation risks in their latest statement, policy-makers made clear inflation was not yet a concern.
“The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the committee expects that inflation will remain subdued for some time,” the Fed said.
The Fed cut rates to near zero at the end of last year as part of a campaign to counter turmoil in financial markets and pull the economy out of a recession that began in late 2007.
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