Fed likely to keep key interest rate low

“The central bankers in the U.S. and Europe are considering the exit strategies,” said Sung Won Sohn, economist at California State University's Smith School of Business. “Even the thought of an exit strategy could spook the financial markets and raise the bond and mortgage yields, hurting the economy.”

Still, there are differences of opinion within the Fed about when it might need to start boosting rates — and how aggressively — to fend off inflation.

Inflation hawks, including the presidents of the Fed banks in Dallas, Philadelphia and Richmond, worry more about super-low borrowing costs and other special supports driving prices higher. But waiting too long could touch off inflation.

If the recovery takes hold, many analysts think the Fed could start to raise rates in the spring or summer. Bernanke and other Fed officials would try to prepare investors, businesses and ordinary Americans of a shift in stance well in advance of any upcoming shift in stance. One clue would come when the Fed opts to drop its “extended period” language, analysts said.

Whenever the Fed starts to boost rates, unemployment likely will still be high, analysts said. The worst recession since the 1930s caused companies to slash jobs and other costs to survive. They won't ramp up hiring until they are confident the recovery is entrenched.

The unemployment rate — now at a 26-year high of 9.8 percent — is expected to keep rising, Bernanke and other Fed officials have said. Economists predict it will hit 9.9 percent when the government releases the latest snapshot on employment conditions on Friday. It could rise as high as 10.5 percent around the middle of next year before declining gradually, analysts said.

Beyond rates, Fed officials in September were conflicted over whether to expand or cut back a program intended to drive down mortgage rates and prop up the housing market, according to minutes of the closed-door deliberations.

1|2

SharePrintEmail

Write a Comment

Terms

Enter your comments - 3000 characters max

Type in image code

Submit

 Receive China Post promos
 Respond to this email