Fed keeps rates on hold but hints it will act soon

THE FEDERAL Reserve last night decided to hold fire on fresh action to stimulate growth, despite admitting the economy was slowing.

In a noticeably more pessimistic portrait of the US economy than last month, the central bank said that economic activity “decelerated” in July and reiterated its former stance that it would hold interest rates near “exceptionally low levels” until at least late 2014.

However, the direct language of its statement – with the Fed saying it would “provide additional accommodation as needed to promote a stronger economic recovery”, has sparked speculation that the central bank could act at its next policy meeting in September.

Analysts believe that fresh action beyond next month is unlikely so close to the November presidential election.

“There remains a general sense of ‘something needs to be done’…extra QE at the September FOMC looks likely,” said ING economist James Knightley.

Meanwhile, the Fed will continue its current policy known as Operation Twist, which swaps short-term bonds for ones with longer durations, in an effort to lower long-term interest rates on mortgages to business loans.

The Federal Reserve has kept interest rates near zero since December 2008, as a way to free up credit following the financial crisis.

To push rates even lower, the central bank has also purchased more than $2 trillion in assets in two rounds of so-called quantitative easing, or QE.

The Fed met a day before today’s key meeting of the European Central Bank. ECB President Mario Draghi last week ratcheted up speculation of further ECB purchases of Italian and Spanish bonds by saying he would do “whatever it takes” to save the euro.

“The big fireworks will be tomorrow,” said Jim Russell, chief equity strategist at US Bank Wealth Management. “Anything short of (aggressive ECB action) will represent a disappointment to capital markets.”

The Dow fell after the decision, closing 32.5 points lower.