The Federal Reserve vowed once again to keep US interest rates at rock-bottom levels for "an extended period" while it waits to measure the strength and sustainability of the economic recovery.
The members of the Federal Open Market Committee, in their latest statement, maintained language that has become a touchstone for the credit markets. Traders parse each new statement for clues as to the timing of the first interest rate hikes, but yesterday's update suggests no change for much of the rest of this year, at least.
The committee opted to hold the target federal funds rate in the zero-0.25 per cent range it first set in December 2008, in the wake of that autumn's financial panic. "Economic conditions, including low rates of resource utilisation, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period," it said. Consumer and business spending has been picking up, it explained, but the economy was still weak, employers were reluctant to create new jobs, and the construction industries remained depressed.
But one member of the committee, Thomas Hoenig, dissented from the decision, saying the phrase "an extended period" should be taken out because exceptionally low rates were causing imbalances in the economy.
Credit markets continue to expect very low interest rates in the short-term and then substantial hikes over the next few years. This has helped to restore profitability to the banking system, which borrows at short-term rates and lends out at higher long-term rates.
The steep yield curve in part reflects some investors' concern about future inflation in the US, which economists say could be one way of reducing the burden of the US government's record borrowing requirements.
Congressmen were tackling the issue of the public finances at a House appropriations committee hearing yesterday, and Tim Geithner, the US Treasury Secretary, agreed that the country must turn to tackling a national debt that has already topped $12 trillion.
"Deficits matter," he said. "Ours are too high. They are unsustainable and the American people along with investors around the world need to have more confidence in our ability to bring them down over time. What people who look at our country – credit rating agencies, investors, Americans – what they look at is whether we have the political will to restore gravity to our fiscal position over time."
However, he batted away one lawmakers' suggestion that the US might one day lose its gold-plated AAA credit rating. "There's no way that's going to happen, Congressman," he said.
Moody's warned this week that the "distance-to-downgrade" of nations including the US had "substantially diminished". The economist Nouriel Roubini wrote yesterday that financial markets could still turn against US debt. "Bond-market vigilantes already have taken aim at Greece, Spain, Portugal, the UK, Ireland, and Iceland, pushing government bond yields higher. Eventually they may take aim at other countries – even Japan and the US – where fiscal policy is on an unsustainable path."