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Fed expected to keep key interest rates near zero
By Mark Felsenthal |
May 25, 2009, Monday
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Print Edition
Print Edition
THE United States Federal Reserve is likely to keep benchmark interest rates near zero for a while in an economy that is pulling out of a steep decline and appears on course for a very gradual recovery, Fed Vice Chairman Donald Kohn said on Saturday.
"The economy is only now beginning to show signs that it might be stabilizing, and the upturn, when it begins, is likely to be gradual amid the balance sheet repair of financial intermediaries and households," Kohn told a conference at Princeton University.
"As a consequence, it probably will be some time before the Federal Open Market Committee will need to begin to raise its target for the federal funds rate," he said.
The US central bank has cut interest rates to near zero and committed to massive lending and securities purchases to heal shattered financial markets and pull the economy out of the longest recession since the Great Depression.
Kohn said that in spite of the fragile state of the US economy and prospect for low rates for a while, the Fed must make plain its plans to pull back its lending when a recovery begins to take hold.
"To ensure confidence in our ability to sustain price stability, we need to have a framework for managing our balance sheet when it is time to move to contain inflation pressures," he said.
The Fed has said that it is willing to expand extensive purchases of mortgage-related and longer-term Treasury securities to support any nascent recovery.
"The preliminary evidence suggests that our program so far has worked," Kohn said, referring to the commitments to buy securities to date.
He said he believes the plan has held down long-term interest rates by as much as 1 percentage point.
"The economy is only now beginning to show signs that it might be stabilizing, and the upturn, when it begins, is likely to be gradual amid the balance sheet repair of financial intermediaries and households," Kohn told a conference at Princeton University.
"As a consequence, it probably will be some time before the Federal Open Market Committee will need to begin to raise its target for the federal funds rate," he said.
The US central bank has cut interest rates to near zero and committed to massive lending and securities purchases to heal shattered financial markets and pull the economy out of the longest recession since the Great Depression.
Kohn said that in spite of the fragile state of the US economy and prospect for low rates for a while, the Fed must make plain its plans to pull back its lending when a recovery begins to take hold.
"To ensure confidence in our ability to sustain price stability, we need to have a framework for managing our balance sheet when it is time to move to contain inflation pressures," he said.
The Fed has said that it is willing to expand extensive purchases of mortgage-related and longer-term Treasury securities to support any nascent recovery.
"The preliminary evidence suggests that our program so far has worked," Kohn said, referring to the commitments to buy securities to date.
He said he believes the plan has held down long-term interest rates by as much as 1 percentage point.
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