World Business

Fed keeps interest rates to near zero

By Pedro Nicolaci Da Costa (China Daily)
Updated: 2010-04-03 10:34

NEW YORK - Interest rates are set to stay near zero for the time being, though the Federal Reserve stands ready to take action if signs of inflation begin to mount, top US central bank officials said.

William Dudley, head of the New York Federal Reserve Bank, offered a relatively measured outlook for the economy, arguing that while a sustainable US economic recovery appears to be under way, growth is likely to remain subdued.

"Given the headwinds created by the collapse of the US real estate market and its consequent damage to the financial system and household balance sheets, it seems unlikely that the recovery will be as strong as we would desire," he told students and faculty at Washington and Lee University in Lexington, Virginia, on Thursday.

Such weakness, reflected in the nation's elevated 9.7 percent unemployment rate, does not mean the Fed is not keeping a close eye on the possibility that inflation will rise.

St Louis Fed President James Bullard said the US central bank would need to act quickly if markets began to expect sharply higher levels of inflation.

"You've got an extraordinary policy in place because of the large shock we've suffered," he told reporters. "It's possible that inflation expectations could start to move out of control, and I think if that (were to) happen, that would trump everything and the Fed would have to come in and take action."

Bullard, a voting member this year on the Fed's policy-setting panel, stressed he did not think inflation expectations were currently out of control or even likely to become so in the future.

Dudley, a former partner at Goldman Sachs, agreed, describing long-term price expectations as "well anchored".

The Fed held rates steady near zero at its March meeting and renewed a pledge to hold borrowing costs exceptionally low for an extended period to nurse the struggling economy back to health.

Officials cite a high unemployment rate as justifying the extended period pledge, but Bullard's remarks show other pressures could force the Fed to tighten financial conditions.

Bullard said he expected a report on Friday to show that employers added jobs in March, in line with private forecasters.

REUTERS