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Fed holds key interest rate near zero as U.S. economic recovery proceeding

06-24-2010 08:42 BJT

WASHINGTON, June 23 (Xinhua) -- The U.S. Federal Reserve said on Wednesday that the U.S. economic recovery is "proceeding," and decided to keep a key interest rate unchanged at a record low of between zero to 0.25 percent to prop up the economy.

Information received recently suggested that "the economic recovery is proceeding and that the labor market is improving gradually," the Fed said.

Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit, said the U.S. central bank in a statement following its two-day policy-making meeting in Washington.

Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls.

Meanwhile, housing starts remain at a depressed level.

The Fed also hinted the Europe's debt crisis raises a risk to the U.S. recovery.

"Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad," said the U.S. central bank, adding bank lending has continued to contract in recent months.

However, the Fed said it "anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time."

Although the economy is stabilizing, the Fed believes that the economy will keep a lid on inflation.

It noted that prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower.

"With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable," the Fed "expects that inflation will remain subdued for some time."

Against this backdrop, the Fed decided to hold the key interest rate, or federal funds rate, which commercial banks charge each other for overnight loans, unchanged at a record low of between zero to 0.25 percent.

Moreover, the Fed said that the interest rate is likely to remain at the current low level for "an extended period".

The policysetting Federal Open Market Committee (FOMC), which approved the monetary policy unanimously, said it would continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

The Fed's decision to leave the interest rate unchanged was in line with economists' expectations.

Most economists believe that the Fed will keep the target range for its bank lending rate between zero and 0.25 percent through the rest of this year and probably into next year to help spur the economy.

However, the Fed's decision to keep rates at record lows drew one dissent. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, for a third straight meeting opposed keeping the yearlong pledge.

Hoenig believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.

Editor:Xiong Qu |Source: Xinhua

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