Federal Reserve officials retained a pledge to keep the benchmark interest rate at a record low for an “extended period” and signaled that European indebtedness may harm American growth.
“The economic recovery is proceeding” and “the labor market is improving gradually,” the Fed’s Open Market Committee said in a statement in Washington. Still, “financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.”
Treasury notes extended gains on speculation the Fed will delay an increase in interest rates. Chairman Ben S. Bernanke is trying to cut unemployment that’s close to a 26-year-high and maintain the recovery as new-home sales slide. He must also contend with fallout from the European debt crisis, which has pushed share prices lower and threatens to shake consumer and business confidence.
“Risks have intensified since the last meeting in April,” Eric Stein, portfolio manager for Eaton Vance Management in Boston, said in an interview with Bloomberg Television. The statement “clearly indicates the Fed is on hold throughout 2010 to 2011,” he said.
The 10-year Treasury note’s yield dropped four basis points, or 0.04 percentage point, to 3.13 percent at 2:19 p.m. in New York.
The central bank, at a two-day meeting, left the overnight interbank lending rate target unchanged in a range of zero to 0.25 percent, where it’s been since December 2008. High unemployment, low inflation and stable price expectations “are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” the Fed said, repeating language from every policy meeting since March 2009.
Policy makers won’t raise rates until the first quarter of next year, based on the median estimate in a Bloomberg News survey of economists this month. The European crisis has prompted analysts at Barclays Capital Inc., Credit Suisse, UBS AG and Deutsche Bank AG to push back by several months their predictions for a Fed rate increase.
U.S. central bankers repeated that inflation is “likely to be subdued for some time.” The Fed also said that “prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower.”
Prices in April rose 1.2 percent from a year earlier under the Fed’s preferred index, which excludes food and energy costs, the slowest pace since 2001.
Kansas City Fed President Thomas Hoenig dissented from the decision for the fourth straight meeting, reiterating his view that the low-rate pledge may fuel asset-price bubbles and limit the central bank’s flexibility to raise borrowing costs.
Rising investor concern that Greece’s debt woes might spread prompted European governments early last month to backstop the euro with a rescue fund of almost $1 trillion.
Fed policy makers held an emergency meeting on May 9 to authorize restarting currency swaps with central banks in Europe, Canada and Japan after closing the financial-crisis program in February. The outstanding balance as of June 16 was $1.24 billion, compared with a high of $583.1 billion in December 2008.
The Fed statement didn’t mention the one other remaining open emergency-lending program, the Term Asset-Backed Securities Loan Facility, which has been scheduled to close on June 30. The program was designed to aid the commercial real-estate market by subsidizing investor purchases of mortgage-backed securities.
Potential to Stall
While Bernanke said June 9 the European crisis would have a “modest” effect on the U.S. assuming financial markets “continue to stabilize,” Fed Governor Daniel Tarullo told Congress in May that the situation has the potential to stall the global economy.
Since the last meeting, the Standard & Poor’s 500 Index has dropped about 8 percent. Private U.S. employers added 41,000 jobs in May, down from a gain of 218,000 in April. Housing starts fell 10 percent to the lowest level this year, sales of previously owned homes dropped the most in four months and retail sales fell for the first time in eight months.
Best Buy Co., the world’s largest consumer-electronics retailer, last week reported first-quarter profit that rose less than analysts projected. FedEx Corp., the world’s largest air-cargo carrier, forecast annual profit that trailed analysts’ estimates on rising health-care and pension costs.
“The recent, incoming news has been worrisome both in the U.S. and Europe, and indications are at this point that the recovery is not as strong or as healthy as we would have hoped,” James Hamilton, a former Fed research adviser who is now at the University of California at San Diego, said before the release.
Fed policy makers delivered updated quarterly economic forecasts at this week’s meeting, and economists including former Fed Governor Lyle Gramley say officials probably trimmed their expectations for U.S. growth.
In April, Fed governors and regional presidents projected an expansion of 3.2 percent to 3.7 percent this year and 3.4 percent to 4.5 percent in 2011. The central bank will release minutes of the meeting, including forecasts, on July 14.
Not all signs are pointing to a growth slowdown. Manufacturing in the U.S. expanded in May for a 10th month as a private export index climbed to the highest level in two decades. Confidence among U.S. consumers rose in June to the highest level in more than two years, according to the Thomson Reuters/University of Michigan survey.
Inflation has slowed further in data released since policy makers last met. The Labor Department’s consumer price index fell 0.2 percent in May after a 0.1 percent drop in April, the first consecutive declines since 2008. Excluding food and energy, the core rate rose 0.9 percent in May from a year earlier, matching the smallest year-over-year gain since 1966.
Retailers are cutting prices and offering discounts to lure shoppers.
Bentonville, Arkansas-based Wal-Mart Stores Inc., the world’s largest retailer, said in April that it reduced prices on more than 10,000 items after sales at U.S. stores dropped. Cincinnati-based Kroger Co., the biggest U.S. grocery-store chain, lured shoppers with discounts on dairy and meats in the quarter ended May 22.
Fed officials are still preparing for an eventual tightening of credit. Last week, the central bank held its first test auction of term deposits, a tool to help drain hundreds of billions of dollars from the banking system. At the April meeting, policy makers debated when and how fast to sell $1.1 trillion of mortgage-backed securities that were purchased to lower home-loan rates and boost the economy.
Today marks the last day of Donald Kohn’s term as Fed vice chairman. Kohn, 67, a 40-year Fed veteran, had planned to retire today before agreeing earlier this month to remain at the central bank as a governor pending a replacement. The Senate has yet to act on President Barack Obama’s April nominations of three Fed governors, including San Francisco Fed President Janet Yellen as Kohn’s successor.