Thursday, 18 September 2014

Fed to keep rates low as US consumer prices fall

The Federal Reserve looks set to keep interest rates low for a considerable time.

After the Fed's monetary policy meeting on Wednesday, Chair Janet Yellen told a press conference that US unemployment remains too high and inflation too low.

While Fed officials raised their median estimate for the benchmark federal funds rate to 1.375 percent at the end of 2015 compared with a June forecast of 1.125 percent, Yellen told the press conference: “Even after employment and inflation are near mandate-consistent levels, economic conditions may for some time warrant keeping the target federal funds rate below levels the committee views as normal in the longer run.”

And while the Fed decided to cut monthly bond buying by $10 billion to $15 billion at the latest meeting, Yellen said it could take to the “end of the decade” to reduce the Fed’s holdings “to the lowest levels consistent with the efficient and effective implementation of policy.”

Yellen's view of inflation was supported by data on Wednesday, which showed that consumer prices fell 0.2 percent in August, although the housing market continues to recover, with the National Association of Home Builders/Wells Fargo housing market index rising to 59 in September from 55 in August.

Data from the euro area on Wednesday showed that inflation there was also low. Consumer prices there rose 0.4 percent in August from a year ago, the same rate as in July but slightly higher than the initial estimate of 0.3 percent.

Meanwhile, the employment picture in the UK improved in July. A report on Wednesday showed that the unemployment rate fell to 6.2 percent in the May-July period, the lowest level since the September-November 2008 period, while average weekly earnings rose 0.6 percent from the previous year.

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