US holds rates at 1958 low, vows patience before a rate rise
1 hour, 56 minutes ago Add Business - AFP to My Yahoo!
WASHINGTON (AFP) - US Federal Reserve (news - web sites) policymakers froze interest rates at a 1958 low but shocked markets into a brisk selloff by apparently laying the groundwork for a future rate increase.
AFP/DDP/File Photo
Related Quotes
DJIA
NASDAQ
^SPC
10468.37
2077.37
1128.48
-141.55
-38.67
-15.57
delayed 20 mins - disclaimer
Quote Data provided by Reuters
Missed Tech Tuesday?
Technology is changing sports-- for better or worse. Plus, tech tools for athletes and sports fans alike.
Federal Reserve chairman Alan Greenspan (news - web sites) and his colleagues voted unanimously to hold the federal funds target rate, which commercial banks charge each other for overnight loans, unchanged at 1.00 percent.
With economic output expanding "briskly," however, the Federal Open Market Committee (news - web sites) (FOMC) members replaced wording in earlier statements that they would be able to keep rates super low for a "considerable period."
Instead members said they could afford to be "patient."
"With inflation quite low and resource use slack, the committee believes that it can be patient in removing its policy accommodation," the policymakers said after a two-day meeting.
The tweaking of the statement sent shivers through the financial markets, which had been banking on a lengthy period of robust economic growth and rock-bottom rates.
Wall Street's Dow Jones industrials average of 30 top stocks tumbled 141.55 points or 1.33 percent in under two hours to close at 10,468.37.
"What hit the markets with a thud was the decision to stop using the phrase, 'considerable' time when describing how long monetary policy could remain accommodative," said Naroff Economic Advisors president Joel Naroff.
"The FOMC had to find a way to move from its aggressive 'considerable period' phrase to something that would signal that rates would be going up," he said.
Use of the word "patient" meant a rate rise was unlikely at the next FOMC meeting March 16, he said.
"But after that, it will be the economy, and more importantly, the labor markets and inflation that determine when they hike rates," Naroff said. "It would take a rapid acceleration in job growth for rates to go up by the summer, but that is possible."
Indeed, the jobs market, the weak spot of the world's biggest economy, appeared to be on the mend, the Federal Reserve policymakers said.
"Although new hiring remains subdued, other indicators suggest an improvement in the labor market," the FOMC statement said.
The US economy generated just 1,000 jobs in December, the government reported.
But weekly unemployment benefit claims have been declining.
Speculation about a reversal in the three-year cycle of interest rate cuts, which slashed 5.5 percentage points off the federal funds rate, has stepped up in tandem with the pace of the economy.
The economy raced in the third quarter to an annual growth rate of 8.2 percent, the fastest since 1984.
Government figures for economic growth in the last quarter of 2003 will be released Friday, with many analysts forecasting an expansion of five percent. Growth in 2004 is being tipped at four percent.
The risks to economic growth were balanced, the FOMC said.
Consumer price inflation was muted and would remain low.
But the deflation menace had retreated, policymakers said. "The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation."
Core consumer prices -- excluding volatile food and energy costs -- rose just 0.1 percent in December.
Super-low rates supported the US economy in 2003, stirring in particular interest-rate sensitive areas such as housing.
Latest government and industry figures showed the searing housing market evaporated previous records in 2003 as total sales topped seven million homes for the first time. |
