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Business News/ News / World/  Fed renews zero interest rate pledge, restates concern on labour market
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Fed renews zero interest rate pledge, restates concern on labour market

Fed announces a further $10 billion reduction in its monthly purchases, leaving the bond buying programme on course to be shuttered next month

Federal Reserve chair Janet Yellen. Photo: BloombergPremium
Federal Reserve chair Janet Yellen. Photo: Bloomberg

Washington: The US Federal Reserve on Wednesday renewed a pledge to keep interest rates near zero for a “considerable time" and repeated concerns over slack in the labour market, standing firm against calls to overhaul its policy statement.

Many economists and traders had expected the central bank to alter the rate guidance it has provided since March, given generally improving data on the economy’s performance.

But the Fed repeated its assurance that rates would stay ultra-low for a “considerable time" after a bond-buying stimulus programme wraps up. In a statement after a two-day meeting, it announced a further $10 billion reduction in its monthly purchases, leaving the program on course to be shuttered next month.

The policy-setting Federal Open Market Committee (FOMC) also repeated its assessment that a “significant" amount of slack remains in the US labour market, a further sign it is no rush to raise benchmark borrowing costs.

“On balance, labour market conditions improved somewhat further; however, the unemployment rate is little changed ...," the FOMC said in its statement.

Dallas Fed president Richard Fisher and Philadelphia Fed president Charles Plosser dissented on Wednesday.

The Fed also released quarterly economic and interest rate projections from its 17 policymakers, extending out to 2017 for the first time.

They suggested a faster pace of rate hikes than envisioned in the last projections in June.

For the end of next year, the median of the projections was 1.375%, compared to 1.125% in June, while the end-2016 projection moved up to 2.875% from 2.50%. For 2017, the median stood at 3.75%.

The Fed also released a new blueprint on its so-called exit strategy, outlining key measures it plans to take in moving from loose to more normal monetary policy. Among its plans, the Fed said that it expects to end or phase out reinvestments after it begins raising interest rates, depending on the state of the economy.

Earlier on Wednesday, the government released data that showed consumer prices notched their first decline in nearly 1-1/2 years in August. The report also showed underlying inflation pressures were muted, which could bolster the Fed’s resolve to keep a loose monetary policy in place.

Some Fed officials have stated publicly that the central bank should stand ready to move rates up sooner and faster than financial markets currently expect given the spate of mostly good news on the economy.

Futures rates suggest traders are betting on an interest rate of 0.75% at the end of 2015.

Eyes On The Labour Market

Prior to this week’s policy meeting, several Fed officials said they were uncomfortable with the central bank’s rate guidance, given that it was pegged to a calendar reference and not the economy’s progress.

Another statement that has come under the microscope is the Fed’s description of slack in the labour market. In July, it said a range of indicators suggested that there remained a “significant underutilization of labor resources." Some officials had taken issue with that line given a sharp drop in the unemployment rate over the past year.

On Wednesday, the Fed kept its description of labour market slack intact.

The unemployment rate dipped back down to 6.1% in August, though job growth slowed and wage gains remained sluggish. Reuters

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Published: 17 Sep 2014, 11:37 PM IST
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