LITTLE ROCK — Federal Reserve officials Wednesday retained a pledge to keep the benchmark interest rate at a record low for an “extended period” and signaled that European government debt may harm American growth.
“The economic recovery is proceeding” and “the labor market is improving gradually,” the Fed’s Open Market Committee said in a statement in Washington. Still, “financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.”
Fed Chairman Ben Bernanke is trying to cut unemployment that’s close to a 26-year-high and maintain the recovery as new-home sales slide. He must also contend with fallout from the European debt crisis, which has pushed share prices lower and threatens to shake consumer and business confidence.
“Risks have intensified since the last meeting in April,” said Eric Stein, portfolio manager for Eaton Vance Management in Boston. The statement “clearly indicates the Fed is on hold through-out 2010 to 2011,” he said.
The central bank, at a two day meeting, left the overnight interbank lending-rate target unchanged in a range of zero to 0.25 percent, where it’s been since December 2008.
High unemployment, low inflation and stable price expectations “are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” the Fed said, repeating language from every policy meeting since March 2009.
Policymakers won’t raise rates until the first quarter of next year is the consensus based on the median estimate in a Bloomberg News survey of economists this month.
The European crisis has prompted analysts at Barclays Capital Inc., Credit Suisse, UBS AG and Deutsche Bank AG to push back by several months their predictions for a Fed rate increase.
U.S. central bankers repeated that inflation is “likely to be subdued for some time.” The Fed also said that “prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower.”
Prices in April rose 1.2 percent from a year earlier under the Fed’s preferred index, which excludes food and energy costs, the slowest pace since 2001.
Kansas City Fed President Thomas Hoenig dissented from the decision for the fourth straight meeting, reiterating his view that the low-rate pledge may fuel asset-price bubbles and limit the central bank’s flexibility to raise borrowing costs.
While Bernanke said June 9 that the European crisis would have a “modest” effect on the U.S. assuming financial markets “continue to stabilize,” Fed Gov. Daniel Tarullo told Congress in May that the situation has the potential to stall the global economy.
Since the previous meeting, the Standard & Poor’s 500 Index has dropped about 8 percent. Private U.S. employers added 41,000 jobs in May, down from a gain of 218,000 in April. Housing starts fell 10 percent to the lowest level this year, sales of previously owned homes dropped the most in four months and retail sales fell for the first time in eight months.
Changes in the federal funds rate are the Fed’s primary tool for influencing the economy. The benchmark rate directly influences other short-term rates, such as the prime rate and credit-card rates.
However, the Fed’s bigger influence on the economy comes from its monetary policy’s effects on long-term borrowing costs, such as rates on mortgages and corporate debt. Those interest rates affect the prices of stocks, bonds, real estate and other assets.
Business, Pages 25 on 06/24/2010