US Fed promises to keep rates low

The Federal Reserve said it was prepared to step into the financial markets to buy US Treasuries in an attempt to drive down interest rates, but it gave no clues yesterday about how soon or how broad such a programme might be.

The Fed's open market committee, chaired by Ben Bernanke, said that credit markets remained "extremely tight" and that, with householders and small businesses finding it hard to get loans, economic activity had weakened further since its last meeting in December.

Yesterday's statement came at the conclusion of a two-day meeting, the first since the FOMC cut official US interest rates in effect to zero. It reiterated its target range for the federal funds rate of 0-0.25 per cent, but it has run out of room to stimulate the economy by traditional means and instead focused on interventions elsewhere in the credit markets.

The idea of buying Treasuries, a proposal it floated last time, appeared to have moved up the agenda yesterday. "The committee is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets," it said.

One committee member, Jeffrey Lacker, dissented, saying the Fed should begin to purchase Treasuries right away, a move that would expand the monetary base and help reflate the economy.

Greg Salvaggio, the vice-president of trading at Tempus Consulting, said the statement was in line with expectations. "They've said they are now prepared to buy Treasuries, which they'd hinted at earlier. Their aim is to keep the short end of the curve compressed and boost efforts to get mortgage rates lower."

The Fed is already spending $800bn (£560bn) buying mortgage-related securities and other asset-backed debt to stimulate the credit markets. The FOMC said it expected the US economy would begin to recover this year, although it expressed for the first time a concern that deflation could take hold. "The committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."