Washington - The Federal Reserve is keeping its economic stimulus effort largely intact, in a cautious posture, as the US economy shows signs of emerging from recession, analysts said.
The central bank acknowledged Wednesday the economy is growing but maintained its near-zero interest rate and trillion-plus dollar effort to support the fragile recovery.
The policymaking Federal Open Market Committee headed by chairman Ben Bernanke voted unanimously to maintain the federal funds rate of zero to 0.25% in place since last December to help jolt the economy out of its worst recession in decades.
The statement "reaffirms the Fed is a long way from executing an exit strategy" from its multi-pronged stimulus, said Sal Guatieri, economist at BMO Capital Markets.
"If anything, it continues to want to prime the monetary pump by extending the mortgage purchase program a few more months."
Guatieri said the central bank "is being extra cautious, it fears slipping back into recession more than rampant inflation, and if it is to err it will be on the side of excessive monetary stimulus."
Despite the upbeat phrase on growth, economists noted that the Fed highlighted concerns about the sustainability of the recovery with consumers still skittish and unemployment rising.
"The Fed seems to be believe that growth will be modest," said Joel Naroff of Naroff Economic Advisors.
The worries are about not just consumers but also businesses... In short, the economy is getting better but it is still not in good shape. That means the Fed is in no hurry to raise rates."
The FOMC statement said it expects that sluggish conditions will "warrant exceptionally low levels of the federal funds rate for an extended period."
The statement noted that "economic activity has picked up following its severe downturn" amid improvements in financial markets and the housing sector.
The panel also pledged to continue a program of more than one trillion dollars to help keep credit flowing to the housing market and other segments of the economy by purchasing mortgage securities and other bonds.
This calls for purchasing a total of $1.25 trillion of government agency mortgage-backed securities and up to 200 billion dollars of other agency debt, a program extended into the first quarter of 2010.
The statement offered few clues as to when the Fed might end its extraordinary policy, but the outlook on the economy was somewhat more upbeat than in August, when the panel said economic activity was "leveling out."
"The Fed seems to be saying that it is not starting to reverse any of its stimulus yet," said Robert Brusca at FAO Economics.
The FOMC comments on inflation - citing "substantial resource slack likely to continue to dampen cost pressures" - appear to allow the Fed to keep pumping money into the economy without fear of sparking a surge in price pressure, said analysts.
"Despite being more upbeat on growth, the committee continues to see 'subdued' inflation for some time," noted Dean Maki at Barclays Capital.
It deleted its reference to rising energy and commodities prices, and added a mention of 'stable' long-term inflation expectations as a reason that inflation would remain low. The inclusion of this phrase highlights the importance the Committee places on expectations in keeping inflation subdued as it pursues accommodative policy."
Naroff pointed out that the Fed left itself considerable flexibility with its vaguely worded promises.
"When will they start raising rates? Not this year, but I still think they will start the process in the first half of next year," he said.
"Remember, the FOMC used the term 'exceptionally low levels,' not current rates. An increase to one percentage point to 1.25 percent would still keep the funds rate at an exceptionally low rate. That is the wiggle room the committee has left itself."
- AFP