US economy to stay in top gear
US interest rates will stay at rock-bottom levels for another three years, the Federal Reserve promised last night, signalling its belief that the country's return to economic prosperity was still over the horizon.
The central bank's interest rate-setting committee surprised financial markets by extending the period for which it expects to hold official rates near zero by another 18 months.
Unemployment is simply not coming down fast enough, the Fed has decided, and any risk of inflation is now so remote it was free to pursue even looser monetary policy. In fact, underlying US inflation will most likely fall below the 2 per cent level that the Fed's economists want to maintain.
"Economic conditions - including low rates of resource utilisation and a subdued outlook for inflation over the medium run - are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014," the Federal Open Market Committee said in its statement.
"The committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually."
Previously, the Fed had said interest rates would stay at near-zero until mid-2013.
Bond traders reacted immediately to the change, pushing down interest rates across financial markets in a move that could quickly feed through into lower mortgage rates for US borrowers and cheaper loans for businesses.
The Fed was also scheduled last night to release details of its staff's forecasts for the US economy and for monetary policy, including the range of expectations for future interest rates.
The central bank, under chairman Ben Bernanke, is trying to make its decision-making more transparent.
He also believes that providing more information will make bond markets more sensitive to small changes in the Fed's thinking, making it easier for it to manipulate market interest rates.
Sean Incremona, economist at 4Cast in New York, said the Fed was driving home the message that it would continue to do everything to support economic recovery.
"The continued dovish tone from the Fed remains intact," he said.