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quinta-feira, novembro 05, 2009

Fed Pledges to Keep Rates Low for 'Extended Period'

Fed Pledges to Keep Rates Low for 'Extended Period'
By Craig Torres

Nov. 4 (Bloomberg) -- The Federal Reserve repeated it will keep interest rates near zero for “an extended period” and specified for the first time that policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline.

“Businesses are still cutting back on fixed investment and staffing, though at a slower pace,” the Federal Open Market Committee said in a statement today. “Household spending appears to be expanding, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit,” the FOMC said after meeting in Washington.

Chairman Ben S. Bernanke is trying to determine when the recovery is strong enough to withdraw the $1 trillion the Fed injected to avert a depression. The dollar declined as the Fed’s statement, which followed a report last week showing the economy expanded last quarter for the first time in more than a year, signaled growth alone won’t be enough to warrant tighter policy.

Officials kept their benchmark overnight lending rate at between zero and 0.25 percent, where it has been since December. The conditions they cited to keep it there are “low rates of resource utilization, subdued inflation trends, and stable inflation expectations.”

“What they’re saying is the economy is improving, but it’s still entirely dependent on stimulus,” said Chris Low, chief economist at FTN Financial in New York, who doesn’t expect an interest-rate increase until next September. Fed officials are signaling that “The test for when rates have to go up, or stimulus has to be removed, ought to be inflation.”

Dollar Slides

The dollar slid as much as 1.2 percent, the biggest intraday decline since Sept. 8, before trading at $1.4876 per euro at 4:09 p.m. in New York, compared with $1.4724 yesterday. The Standard & Poor’s 500 Index was up 0.1 percent at 1,046.50 after rising as much as 1.5 percent.

Discussing inflation, the central bank said: “With substantial resource slack likely to continue to dampen cost pressures and with longer term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.”

Prices rose 1.3 percent for the 12-month period ending September, as measured by the personal consumption expenditures price index, minus food and energy, the Fed’s preferred gauge. Fed officials cited a 1.7 to 2 percent long-run goal for the overall index in June.

Core Inflation

“The Fed is focused on a very low core inflation number and is assuming that it is only going to get lower,” said Stephen Stanley, chief economist at RBS Securities Inc. “They are pretty worried about the low level of inflation and think they are on hold for a very long time.”

The difference in yield between 10-year inflation-protected Treasury notes and nominal Treasury notes is 212 basis points, indicating that investors see consumer prices rising by 2.12 percent per year over that time. In October, consumers anticipated inflation of 2.9 percent over the next five years, up from 2.8 percent in September, according to the University of Michigan’s consumer sentiment survey, released Oct. 30.

The Fed completed its $300 billion program of purchasing Treasuries last month. Today’s statement said the central bank will purchase a total of $1.25 trillion of agency mortgage- backed securities and “about $175 billion of agency debt” through the first quarter of next year.

“The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion is consistent with the recent path of purchases and reflects the limited availability of agency debt,” the statement said.

Australia, Israel

The ebb of the global crisis that caused $1.7 trillion in credit losses and writedowns has already helped spur central banks from Australia to Norway to start increasing borrowing costs. Today’s unanimous statement indicates the Fed isn’t yet ready to follow some of their counterparts abroad.

“We are nowhere near there,” Michael Holland, chairman of New York-based Holland & Co., which oversees more than $4 billion in assets, said on Bloomberg Television. “We don’t have anything approaching the position where they can start unwinding.”

Record-low interest rates and Fed purchases of Treasuries and mortgage debt, combined with the Obama administration’s $787 billion fiscal stimulus, helped boost gross domestic product 3.5 percent from July to September. Without the auto industry, which benefited from the government’s “cash for clunkers” program, growth would have been 1.9 percent.

Commodities Rally

Stocks and commodities have rallied as a stronger global economy encourages investors to take greater risks. The Standard and Poor’s 500 Index is up about 17 percent this year and crude oil prices are 80 percent higher. Gold has advanced 23 percent and touched a record of $1,096.20 an ounce in New York today.

Policy makers are “trying to add some sort of conditionality to their ability to include or exclude the ‘extended period’ language,” said Alan Ruskin, head of currency strategy at RBS Securities Inc. in Stamford, Connecticut.

While the return to growth has aided companies including Ford Motor Co., it has yet to pay off in jobs, with employers squeezing higher output from a smaller labor pool.

Ford, the only major U.S. automaker to avoid bankruptcy, beat forecasts and posted third-quarter net income of $997 million Nov. 2, its first operating profit since early 2008 on smaller discounts and higher sales.

Job Cuts

New Brunswick, New Jersey-based Johnson & Johnson said Nov. 3 it will shrink its 117,000-member workforce by 6 percent to 7 percent as it tries to cut costs and invest in more profitable areas of its business. Jabil Circuit Inc., a Florida-based electronics manufacturer whose customers include Nokia Oyj, said Sept. 29 it plans to cut an additional 1,500 positions.

“If employment losses don’t get down to a small level, we won’t have income growth to support consumer spending,” Kurt Karl, chief U.S. economist at Swiss RE Financial Products in New York, said before today’s Fed announcement.

The Labor Department on Nov. 6 will report that the unemployment rate rose to 9.9 percent in October, from 9.8 percent the previous month, as companies cut another 175,000 jobs, according to the median forecasts in Bloomberg News surveys of economists. More Americans filed bankruptcy in October than any month since changes to bankruptcy laws in 2005.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

Last Updated: November 4, 2009 16:32 EST

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