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US Central Bank Keeps Interest Rates Low


The U.S. central bank is leaving interest rates unchanged amid a modest increase in economic activity. The Federal Reserve concludes a closely-watched two-day policy meeting on Wednesday.

In a statement, the central bank said U.S. economic activity has picked up following a severe downturn, but remains weak. As a result, the Federal Reserve says it plans to keep interest rates unchanged for "an extended period" - language seen by many economists as a pledge against a rate hike until sometime next year.

The Fed has kept a key lending rate at just above zero percent since late 2008, coinciding with the deepest and longest recession since World War II. The question for economists is not whether the central bank will eventually raise interest rates from historic lows, but rather when will the Fed conclude it can do so without stalling economic growth.

With the U.S. unemployment rate at 9.7 percent and projected to rise, the central bank is unlikely to tighten credit to any significant degree before 2011, according to RBC Capital Market interest rate strategist, Ira Jersey.

"Our expectation is for [economic] growth over the next couple of years to be very slow, although positive, and not enough to bring down unemployment very significantly - which is really what policymakers have to be cognizant of and one of the reasons we think that the Fed's policy will remain very accommodative over the next several years," Jersey spoke on Bloomberg television.

Since vast amounts of business and consumer activity is conducted on credit, low interest rates are seen as stimulative to the economy as a whole, while high interest rates are seen as restrictive. Central banks typically raise interest rates during boom times to prevent economies from overheating and guard against inflation and, typically, lower interest rates in response to economic downturns and the risk of deflation.

In addition to maintaining current interest rates, the Federal Reserve announced that it is extending the timeframe of a $1.45 trillion program to purchase debt and securities tied to America's beleaguered home mortgage industry. The program was to be completed by the end of the year, but will now continue to operate through the end of March, 2010. A rash of home foreclosures helped precipitate last year's financial crisis in the United States.

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