Patient Fed keeps rates on hold as US inflation remains subdued

The US Federal Reserve left its key short-term interest rate target unchanged yesterday, and signalled that given the current "jobless recovery"' in the US, a rise in rates was still several months off.

In the closely watched statement accompanying the rates decision, the Fed said that its "accommodative" stance on monetary policy, combined with the continuing strong growth in productivity, was keeping the economy moving ahead.

With inflation at a low level and resource use slack, the Fed could remain "patient" before changing its policy. This language indicates that unless inflation takes a sharp turn for the worse, rates may not budge until after November's presidential election.

The widely anticipated decision by the policy making Federal Open Market Committee means that the fed funds rate, at which the central bank makes overnight money available to commercial banks, stays at a 45-year low of 1 per cent - the level at which it has been pegged since June 2003.

The news left the markets more or less unmoved, with the Dow Jones remaining about 75 points up in the early afternoon.

According to the FOMC, evidence accumulated since its last meeting indicated that output was continuing to expand at a "solid pace". But "although job losses have slowed, new hiring has lagged," leaving the upside and downside risks to sustainable growth "roughly equal" over the next quarters.

"If anything the language is slightly more pessimistic about the economy," Alan Blinder, a former fed vice chairman and a partner at Promontory Financial Group, said, arguing that if anything the statement pushed back the moment when short-term rates would start to climb again.

The last possibility that the central bank might spring a surprise by raising rates vanished with the dismal February employment figures, and the sharp fall in share prices after last week's terrorist attack in Madrid.

The Fed clearly hopes that leaving rates so low offers the best chance that the solid recovery under way here will finally induce companies to hire new workers. Most economists expect GDP growth of 4 per cent or more in 2004 - yet in February payrolls rose just 21,000.

That figure is far below the 150,000 needed to keep pace with a growing labour force, and a fraction of the 200,000 new jobs a month once confidently predicted by the Bush administration.

The headline unemployment rate did hold unchanged at 5.6 per cent last month, but only because many discouraged applicants simply gave up looking for work. In all, 392,000 people left the labour force between January and February. One encouraging sign, however, was a new report by the Manpower Inc independent group, finding that 28 per cent of chief executives plan to take on new staff in the coming months, a three year high.