US Fed warns on recovery as it holds rates at record low

The US Federal Reserve yesterday signalled at least several more months of exceptionally low interest rates, and warned that America's economic recovery might lose some steam, thanks to renewed financial uncertainties and continuing unemployment.

The downbeat statement after the latest meeting of the Fed's policy-setting open market committee, came as a report showed that new home sales fell by a record amount last month.

That news from the Commerce Department came as no surprise because a government tax credit for homebuyers expired on 30 April, but the size of the decline was a shock: an unprecedented 33 per cent.

The figures were the second disappointing news about the housing market in the space of 24 hours, and underlined the continuing weakness of the sector whose collapse in 2008 set off the financial crisis.

In a statement after a two-day meeting, the Fed used the familiar language of "exceptionally low levels for the federal funds rate for an extended period", as it left its target for that key benchmark rate at between zero and 0.25 per cent. But elsewhere the statement was gloomier than the one issued after the last meeting in April.

It said that financial market conditions were now "less supportive" of economic growth, not least because of the turmoil in the eurozone, while the pace of growth was "likely to moderate for a time". The phrasing reflects growing fears that the upswing is losing steam, temporarily at least. Indeed, some believe deflation now poses a greater threat than inflation. At 0.9 per cent, the annual core inflation rate in May was below the Fed's assumed target level of between 1.5 and 2 per cent, despite 18 months of extraordinarily lax monetary policy.

The Fed chairman, Ben Bernanke, told Congress earlier this month that, after months of being kept afloat by massive government stimulus, the US economy was increasingly being driven by private demand. But he warned that it would take "a significant amount of time" before the nearly 8.5 million jobs lost in the recession were made good. The central bank is forecasting US growth of 3 per cent this year and an acceleration in 2011.

The next interest rate move by the Fed is still expected to be an increase, but not until December at the earliest. But worries about a double-dip recession have led to calls for more quantitative easing.