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US Central Bank Maintains Low Interest Rate


The US central bank on Wednesday opted to leave interest rates unchanged, saying economic weakness likely will continue.

The Federal Reserve said economic conditions warrant continued exceptionally low interest rate levels for what it termed "an extended period".

In a statement issued at the end of a two-day monetary policy meeting, the Fed said the pace of economic contraction is slowing, conditions in financial markets have improved and household spending has stabilized. But the central bank noted that job losses and tight credit conditions continue to cause financial strain as businesses cut back on investment and staffing.

The Federal Reserve predicted a gradual return to economic growth in the United States, with low risk of inflation.

For most of the past year, the U.S. central bank has pumped unprecedented amounts of liquidity into the market to rescue a teetering financial system and combat a severe recession. At the same time, it has cut interest rates to historic lows. Going forward, analysts say that Fed Chairman Ben Bernanke has a fine line to walk between a lax monetary policy that could spark inflation and drive up interest rates, and a tighter policy that could choke off economic recovery before it has a chance to take hold.

A ballooning federal deficit is complicating matters for Washington policymakers, according to economist Nouriel Roubini, who teaches at New York University's business school.

"The reality is that the budget deficit is very large," said Nouriel Roubini. "If you raise taxes and cut spending, then reduction in real income might tip the economy into recession. [But] if you do not do the fiscal adjustment because the economy is weak and the budget deficit stays large, you are forced to monetize them and that leads to higher interest rates."

Roubini spoke on Bloomberg television.

Wednesday brought mixed U.S. economic data. On the positive side, the Commerce Department reported a jump in orders for large manufactured items in May. The 1.8 percent boost surprised many financial observers who had been expecting a decline.

PNC Financial Services Group chief economist Stuart Hoffman:

"That is a good sign," said Stuart Hoffman. "It does suggest that the actual production and maybe even employment by manufacturers will finally show some increases, maybe by the fourth quarter of the year."

But new home sales fell last month, a sign that recovery in America's battered housing sector might be slow to materialize.

Economist Patrick Newport of IHS Global Insight:

"Home sales will probably stay relatively flat over the next twelve months," said Patrick Newport. "The reason for that is that the economy is still very weak. People do not move a lot. And so homes do not sell all that much."

A dramatic run-up in housing prices helped fuel an economic expansion from 2003 to 2007 and a rash of home foreclosures that played a central role in last year's financial crisis and economic downturn.

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