Fed promises to keep rates low for at least 2 years

The Federal Reserve said on Tuesday it will keep its hefty monetary policy stimulus for at least another two years, an effort to support a flagging economy and fragile global markets that faced considerable internal dissent.

It was unclear whether the decision, which involved no new commitment of funds for bond purchases, would be enough to put a floor on a U.S. stock market that has fallen more than 15 percent in the last two weeks.

The Fed said U.S. economic growth was proving considerably weaker than expected, suggesting inflation, which has already moderated recently, will remain contained for the foreseeable future.

Three officials, Richard Fisher of the Dallas Fed, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia, voted against the move.

"The committee currently anticipates that economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013," the U.S. central bank said in a statement.

It also reiterated its policy of reinvesting the proceeds from bonds maturing in its portfolio, though it did not state a specific time frame for such actions.

The Fed's decision comes with financial markets in turmoil as worries escalate about heightened risks to the global economy after an embarrassing downgrade of U.S. debt. In addition, fears remain that European efforts to put a safety net under heavily indebted Italy and Spain may not suffice to avert wider credit market disruptions.

In an attempt to tamp down market volatility, finance ministers and central bankers of the Group of Seven major world economies issued a statement on Sunday after a global telephone conference saying they were ready to act to ensure stability.

U.S. stocks were up on Tuesday ahead of the FOMC announcement but suffered their worse drop since the financial crisis this week.

Analysts attribute the sell-off to a pileup of bad news, including weak U.S. economic growth of less than one percent in the first half of 2011, the debt crisis in Europe and the rancorous debt limit standoff in Washington that pushed the United States perilously closely to a debt default.

Officials had been pinning hopes for an acceleration of U.S. growth in the second half of the year on a healing of supply chain disruptions from Japan's natural disasters, a calming of debt woes in Europe as governments committed to more sustainable fiscal paths, and steady gains in business and consumer confidence in the United States.

But those expectations, along with the Fed's forecast for a growth rate of between 2.7 percent and 2.9 percent in 2011, have appeared increasingly over-optimistic in recent weeks.

While there were modestly encouraging signs in hard-hit labor markets in July, the unemployment rate remained lofty at 9.1 percent. Other economic reports have pointed to weak manufacturing and sluggish consumer spending.

A Reuters poll showed analysts now see a one in four chance the U.S. economy will slip back into recession. Two weeks ago, economists saw the chances of another recession as one-in-five.

Economists also cut their forecasts for third-quarter growth to an annualized 2.3 percent from 3.1 percent in the July poll.

[Source: By Pedro da Costa and Mark Felsenthal, Reuters, Washington, 09Aug11]

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