Lack of inflation prompts US Fed to guarantee long period of low rates

The US Federal Reserve promised it would keep interest rates exceptionally low for an extended period, even though consumer spending has started to recover in the world's largest economy.

In a doveish statement, the central bank said there continued to be no signs of inflation, and it made no attempt to signal that efforts to stimulate the economy were coming to an end.

Although the Fed's open market committee did shave $25bn from the total sum it is pumping into the capital markets in an attempt to hold down mortgage rates, it said this was only the result of a shortage of the particular kind of mortgage-related debt it planned to buy.

In all, the Fed has said it will buy more than $1.5trillion of government and mortgage-related debt under its quantitative easing programme.

Financial markets are stable and the economy is picking up, it said, but threats remain. "Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace," it said – conditions "likely to warrant exceptionally low levels of the federal funds rate for an extended period".

Official interest rates are being held in a range of zero to 0.25 per cent, to counter the worst financial crisis and recession since the Great Depression. The US economy grew at an annualised rate of 3.5 per cent in the third quarter, but the recession that began in December 2007 will only be declared over when the National Bureau of Economic Research sees an improvement in employment as well as economic growth.

The state of the US labour market will come into sharper focus tomorrow, when the government reports the official unemployment rate for October. Economists predict it has edged up from 9.8 per cent to 9.9 per cent, and there was no change to that consensus after yesterday's release of a monthly survey of private sector jobs by Advanced Data Processing. The October ADP survey showed companies cut 203,000 positions and that the pace of lay-offs continues to slow.

Also yesterday, the Institute for Supply Management reported its latest monthly survey of the non-manufacturing sector of the US economy, which produced a reading of 50.6 for October. That was down from 50.9 the previous month, but still showed the dominant service sector was growing.