WASHINGTON – Federal Reserve officials opted Tuesday to keep U.S. interest rates at 45-year lows, and said rates would stay down for a long time to lift an economy that is losing jobs.
In announcing their unanimous and widely expected decision to leave the benchmark federal funds rate (search) at a 1958 low of 1 percent, policy-makers repeated a warning that already low inflation could move disturbingly lower.
"The risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future," the policy-setting Federal Open Market Committee (search) said. "In these circumstances, the committee believes that policy accommodation can be maintained for a considerable period."
The pledge on low rates gave the stock market a boost. The technology-heavy Nasdaq Composite posted its biggest one-day percentage gain in 10 weeks and the blue-chip Dow notched its biggest one-day percentage rise in more than seven weeks.
In addition, the value of the dollar rose but prices for U.S. Treasury securities were little changed.
Fed officials are concerned relatively high unemployment and unused production capacity could slow inflation and sap some of the stimulus low rates offer.
Some have argued a stable and positive rate of inflation is the best buffer against the risk of deflation, a persistent and potentially crippling drop in consumer prices.
Numerous signs have emerged suggesting the pace of recovery has quickened appreciably of late, lessening deflation risks, but economists said the Fed was far from expressing glee.
"The biggest surprise was that the tenor of the statement did not change much at all," said Chris Low, chief economist at FTN Financial in New York. "The Fed is making it clear they are not bothered by strong growth and there is no intention of raising rates."
The Fed's announcement matched nearly word-for-word a statement issued after its last meeting in August. However, a month ago they called labor market indicators "mixed." This time they noted the economy was losing jobs.
"It's a touch more dovish," said Henry Wilmore, chief economist at Barclay's Capital in New York.
Since the economy turned down in March 2001, 2.8 million Americans have lost their jobs. Even this August, 21 months after the recession ended, the economy shed 93,000 jobs.
Economists said the failure to create jobs keeps alive the risk growth could falter once a boost from tax cuts fades.
While most economists expect the next move in interest rates to be higher, eventually, some said the Fed's language suggested a further rate cut was not yet out of the question.
"Our forecast is for the next move to be a tightening, but I continue to believe that there's still a one-in-three chance that the next move by Fed is an easing," said Cary Leahey, senior U.S. economist of Deutsche Bank Securities in New York. "The probability of an easing has gone up after this meeting."
Even before Tuesday's meeting, there was considerable debate on when the central bank might begin bumping rates up and economists said the Fed's statement hammered home the view that any rate hike is still some way off.
A Reuters poll of top Wall Street firms found most expect the Fed to wait until late 2004, if not longer, before moving rates higher. The survey of 20 of the so-called primary dealers who deal directly with the Fed in the market found only two looking for a further reduction in rates.
A report earlier Tuesday underscored the lack of inflation pressure. The so-called core Consumer Price Index (search), which strips out volatile food and energy costs, inched up just 0.1 percent in August, the Labor Department said.
Over the past 12 months the core rate has risen a meager 1.3 percent, the tamest pace in over 37 years. Fed officials think the CPI overstates inflation by about 1 percentage point, meaning actual underlying inflation may be close to zero.
Economists said low inflation gives the Fed ample room to wait to ensure the pickup in growth proves lasting and begins whittling away at unemployment and unused industrial capacity.