THE US Federal Reserve signalled it would hold interest rates close to zero for at least six months yesterday as it gave a mixed outlook on America’s journey out of recession.
Wall Street shares rose after the Fed said rates would stay in the 0-0.25 per cent range “for an extended period”, a relief to markets after one member – Kansas City’s Thomas Hoenig – argued for a more hawkish stance for the second time in a row.
The central bank’s message was more upbeat than its January note. Chairman Ben Bernanke said economic activity had continued to strengthen, with signs of stabilisation in the labour market.
However, he cautioned: “Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit.”
Bernanke also drew attention to the contraction in bank lending, a particularly poor omen given the imminent end of the Fed’s $1.4 trillion (£919bn) asset buying programme.
Paul Dales of Capital Economics predicted a rate hike would be as distant as 2012. He said: “There are signs the Fed’s beginning to get concerned about a few things. If bank lending falls further that really could put the stops on the economic recovery.”
The dollar fell 0.5 per cent as traders priced in extended low rates.