Market Watch

FED STILL ON HOLD, SAYS RECOVERY IS ADVANCING

Federal Reserve officials held firm to their pledge to keep the benchmark interest rate target at a record low level for an “extended period” Wednesday in a statement following a twoday meeting of the Federal Open Market Committee (FOMC). The committee also noted that European indebtedness could stunt American economic growth. The range for Fed funds has been between zero and 0.25% since December 2008. High unemployment, low inflation and stable price expectations “are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” the Fed noted, repeating language from every policy meeting since March 2008. The committee noted the impact of the European debt crisis, saying “financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.”

Committee members reiterated that inflation is “likely to be subdued for some time.” The Fed also said that “prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower.” Prices in April rose 1.2% from a year earlier on the Fed’s preferred measure, the core personal consumption expenditures (PCE) index, the slowest pace since 2001. The Fed’s target range for this index is between 1.75-2%. The committee’s statement also noted that “the economic recovery is proceeding” and “the labor market is improving gradually.”

Kansas City Fed President Thomas Hoenig dissented from the decision for the fourth straight meeting, reiterating his view that the low-rate pledge may fuel asset-price bubbles and limit the central bank’s flexibility to raise borrowing costs.

Treasury notes and bonds extended gains, stocks rose and the dollar fell on speculation the Fed will delay an increase in interest rates even further into the future. The next scheduled meeting of the FOMC will be on August 10.