Fed statement: interest rates won't go up anytime soon

The Fed upgraded its view of the economy, but its priority is still to encourage economic growth. Until then, it's not raising interest rates.

By , Staff writer

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    Traders in the S&P 500 options pit at the Chicago Board of Trade signal orders shortly after the Federal Reserve's decision to leave the fed funds rate unchanged between zero and 0.25 percent in Chicago on Wednesday.
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The economy is improving, but it has a long way to go before policymakers will start raising interest rates.

That was the message from the Federal Reserve after an official meeting Wednesday.

Even as the Fed upgraded its view of the economy, Job 1 is still to coax the economy to grow. Until then, inflation isn't likely to be a big worry.

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The Fed's statement provided little new guidance for investors worried about whether the central bank can find a successful "exit strategy" from abnormally low interest rates – without either fueling inflation or harming a tentative economic recovery.

For example, the idea that the Fed feels compelled to hold short-term interest rates near zero "for an extended period" (in the words of the statement) may cast the US as a laggard, compared with other nations where the economy is rebounding more easily. The value of the US dollar fell on foreign exchange markets after the Fed's announcement.

Still, the Fed added some upbeat language lacking after its August meeting.

Data suggest that "economic activity has picked up," the Fed's policy team said, whereas in August it saw the economy "leveling out." The Fed also made new reference to real estate conditions, saying "activity in the housing sector has increased."

The central problems in the economy remain, however. Household spending "remains constrained" by a weak job market, tight credit, and a decline in wealth during the recession, the statement said. The result is a gap between what the economy is able to produce and what is being purchased.

But economists differ in estimating the size of that gap. The bigger it is, the longer it will be before inflationary pressures are likely to show up in consumer prices. For its part, the Fed expects inflation to remain subdued for some time.

Many private-sector economists agree. Andrew Tilton of Goldman Sachs, for instance, says in a recent analysis that growth of credit and money supply has been decelerating, which "suggests little risk of inflation in the near term."

That, in turn, may prevent upward pressure on interest rates in the bond market and give the Fed ample time to transition its policies as the economy recovers.

Still, several forces could complicate the Fed's task. As other nations recover, oil prices could rebound – putting upward pressure on consumer prices and imposing some restraint on the economy's growth. Moreover, if investors' expectations of inflation rise, interest rates could follow whether the Fed feels ready or not.

On policy matters, the Fed kept its interest-rate message unchanged but fine-tuned its plans for supporting credit markets by purchasing mortgage-based securities. Earlier, the Fed had outlined an exit from that program by October. On Wednesday, it slowed the timetable, saying its gradual slowdown in purchases will be finished by the end of next year's first quarter.

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The Fed's statement

For a look at the outlook of other central banks, click here.

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