THE Federal Reserve last night heralded further signs of improvement to the US economy but voted to keep interest rates on hold at 0.25 per cent.
The jobs market was given a special mention by the Fed which noted that “deterioration… is abating.” However, the Fed’s upbeat reference to the recession-battered US economy was not replicated in the markets. The S&P 500 paired back early gains and the benchmark three-month US Treasury bill stayed relatively flat. The dollar was equally unfazed.
Although the Fed said the economy is turning a corner, its statement was shrouded in caution as it reiterated its pledge to keep monetary conditions loose “for an extended period” due to subdued inflation trends.
The Fed also confirmed that it will exit its position as lender of last resort for the financial markets by 1 February, when it anticipates most of the special liquidity facilities put in place for the banks after the financial crisis in 2008 will expire.
“All the Fed is doing is allowing loan facilities to expire that are barely being used anyway because of lack of demand,” said Paul Ashworth of Capital Economics. “It is not a sign that monetary policy is about to be tightened.”
The unanimous decision to keep rates on hold came as Fed chairman Ben Bernanke was voted Time magazine’s Person of the Year, and a day before the US senate vote whether or not to reconfirm him for a second term as head of the US central bank.
The Fed’s hands are tied at this stage of the economic recovery, as it tries to balance when to withdraw economic stimulus with providing enough support to the markets.
“Its efforts to provide the best financial conditions for the recovery mean that any steps it appears to be taking towards tightening in terms of text changes will remain tiny, right up until the point that it is ready to pull the trigger and tighten,” said Rob Carnell of ING Markets.
Anna Piretti, economist at BNP Paribas, said: “This is the first step in removing the policy stimulus, but it doesn’t mean they are about to raise rates.”