Fed to hold interest rates near zero for two years
Source: Agencies |
August 11, 2011, Thursday
|
Print Edition
Print Edition
THE US Federal Reserve on Tuesday took the unprecedented step of promising to keep interest rates near zero for at least two more years and said it will consider further steps to help growth, sparking a rebound in stocks.
The Fed painted a gloomy picture, saying US economic growth was considerably weaker than expected, inflation should remain contained for the foreseeable and unemployment, currently 9.1 percent, would come down only gradually.
An unusually divided central bank pledged to hold benchmark rates at rock-bottom until mid-2013, and opened the door to other tools to support growth. The announcement demonstrated just how long the central bank expects it to take before a flagging economy can gather significant momentum.
Omer Esiner, chief markets analyst at Commonwealth Foreign Exchange in Washington, said: "The statement was extremely negative in its outlook on the economy.
"By pegging the extraordinarily low interest rates to a date in the distant future, the Fed has essentially said it sees the current level of weakness lasting far longer than previously expected."
Financial markets, hungry for support from the Fed after bruising losses over the past eight days that have wiped US$3.8 trillion from global stock portfolios, were jolted by the news.
US stocks sank initially and then seesawed wildly before rallying. The Dow ended up 4 percent at 429.92. Treasury yields sank, the two-year note plunging to a record low of 0.1647 percent, and the dollar declined.
But there was doubt over how long the rally might last given the weak outlook. In a Reuters poll of primary dealers who trade directly with the Fed, an increased number said they believed the central bank will have to fire another gun before long, such as quantitative easing.
The poll found that 37.5 percent now see the Fed resuming bond-buying within the next six months, compared with 27.5 percent who had expected more QE within two years when polled last Friday.
Alberto Bernal, head of emerging markets fixed-income research at Bulltick Capital Markets, said: "If they have to act, they will. They did not act today because they did not want to send a specific message of panic."
The Fed said three policymakers dissented, the biggest disagreement since 1992, indicating unusual uncertainty about the outlook. The dissenters had wanted to avoid any specific time reference on the low-rates pledge.
Markets will now be looking to Fed chairman Ben Bernanke's annual speech at the Jackson Hole meeting for further insight into policy.
There is plenty of doubt about the Fed's power to stimulate the economy with rates already so low. Japan provides a disheartening example of a country that has kept borrowing costs low for many years without any notable spike in growth.
The Fed's decision comes amid financial market turmoil, as worries about the global economy escalate after an embarrassing downgrade of US debt. There are also fears that European efforts to hold back a spreading debt crisis will be insufficient.
The Fed painted a gloomy picture, saying US economic growth was considerably weaker than expected, inflation should remain contained for the foreseeable and unemployment, currently 9.1 percent, would come down only gradually.
An unusually divided central bank pledged to hold benchmark rates at rock-bottom until mid-2013, and opened the door to other tools to support growth. The announcement demonstrated just how long the central bank expects it to take before a flagging economy can gather significant momentum.
Omer Esiner, chief markets analyst at Commonwealth Foreign Exchange in Washington, said: "The statement was extremely negative in its outlook on the economy.
"By pegging the extraordinarily low interest rates to a date in the distant future, the Fed has essentially said it sees the current level of weakness lasting far longer than previously expected."
Financial markets, hungry for support from the Fed after bruising losses over the past eight days that have wiped US$3.8 trillion from global stock portfolios, were jolted by the news.
US stocks sank initially and then seesawed wildly before rallying. The Dow ended up 4 percent at 429.92. Treasury yields sank, the two-year note plunging to a record low of 0.1647 percent, and the dollar declined.
But there was doubt over how long the rally might last given the weak outlook. In a Reuters poll of primary dealers who trade directly with the Fed, an increased number said they believed the central bank will have to fire another gun before long, such as quantitative easing.
The poll found that 37.5 percent now see the Fed resuming bond-buying within the next six months, compared with 27.5 percent who had expected more QE within two years when polled last Friday.
Alberto Bernal, head of emerging markets fixed-income research at Bulltick Capital Markets, said: "If they have to act, they will. They did not act today because they did not want to send a specific message of panic."
The Fed said three policymakers dissented, the biggest disagreement since 1992, indicating unusual uncertainty about the outlook. The dissenters had wanted to avoid any specific time reference on the low-rates pledge.
Markets will now be looking to Fed chairman Ben Bernanke's annual speech at the Jackson Hole meeting for further insight into policy.
There is plenty of doubt about the Fed's power to stimulate the economy with rates already so low. Japan provides a disheartening example of a country that has kept borrowing costs low for many years without any notable spike in growth.
The Fed's decision comes amid financial market turmoil, as worries about the global economy escalate after an embarrassing downgrade of US debt. There are also fears that European efforts to hold back a spreading debt crisis will be insufficient.
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