Federal Reserve: US interest rates to remain near zero

 
Joe Hall
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Interest rates will remain near zero, says the Fed (Source: Getty)
The Federal Reserve has stuck to its pledge to keep interest rates near zero for a "considerable time" after its asset purchase program ends next month.
In a statement following the Fed’s Open Market Committee, the US central bank also announced it had sliced a further $10bn from the programme, leaving it with monthly purchases of $15bn.
In a statement the Fed said that US “economic activity is expanding at a moderate pace”, but did say the unemployment rate had not changed, suggesting “underutilization of labor resources.”
With inflation remaining under the committee’s two per cent objectives, the Fed insisted it would continue its low rates guidance heading into 2015, however there was a slight increase in projections from its 17 policymakers.
Overall, projections pointed to faster rate hikes than had been expected in July. The committee’s expected rate for the end of next year rose from 1.125 per cent to 1.375 per cent, end of 2016 went from 2.50 to 2.875, while 2017 rates are expected to be at 3.75 per cent.
Janet Yellen, the Federal Reserve chairwoman, delivered another dovish press conference in which she said that financial instability could keep rates at levels lower than what could be considered normal, even if employment and inflation reach mandate-consistent levels.
Yellen said:
Regarding interest rates, the committee reaffirmed its forward guidance that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase programme ends.
The committee’s expectations for the path of the federal funds rate are contingent on the economic outlook. If the economy proves to be stronger than anticipated by the committee, resulting in a more rapid convergence of employment and inflation to the FOMC’s objectives, then increases in the federal funds rate are likely to occur sooner and to be more rapid than currently envisaged.
Conversely, if economic performance disappoints, increases in the federal funds rate are likely to take place later and to be more gradual.
Unemployment remains stagnant
The US unemployment rate fell back to 6.1 per cent in August, the same rate it had been at the last time the FOMC met. In a statement the Fed said a range of labour market indicators suggested there remained "significant underutilization of labour resources" in the country - the same message given last July.
There was some good news as the Fed insisted it was making progress toward maximum employment, and labour market conditions were slowly improving thanks to the asset-purchasing programme which has helped to facilitate a two per cent drop in the unemployment rate in two years.
However, overall the labour market has yet to fully recover from the crash in 2008:
Positive inflation outlook
In her speech, Yellen said that the "likelihood of inflation running persistently below two per cent has diminished somewhat". The committee is targeting two per cent inflation, in August it was at a level of 1.7 per cent.

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