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U.S. to keep near zero interest rate for two more years for economic recovery

(Xinhua)

09:06, August 10, 2011

The U.S. Federal Reserve building is seen in the photo taken in Washington D.C., the United States, Aug. 9, 2011. The U.S. Federal Reserve announced Tuesday that it will keep the historic low level of federal funds rate at least through mid-2013 to stimulate the slower than expected economic recovery. (Xinhua/Zhang Jun)

WASHINGTON, Aug. 9 (Xinhua) -- The U.S. Federal Reserve announced on Tuesday that it will keep the historic low level of federal funds rate at least for two more years to stimulate the slower than expected economic recovery.

Economic conditions "are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013," the Fed noted in a statement released after the meeting of the Federal Open Market Committee (FOMC), the interest rate policy making body of the central bank.

It's the first time the Fed has pegged its "exceptionally low" rates to a specific date. In previous statements after the FOMC meetings, the Fed had only said that it would keep the low interest rate for "an extended period," which usually means three to six months.

To tackle the financial crisis and economic recession, the Fed has been keeping the federal funds rate at 0 to 1/4 percent since Dec. 2008.

Based on information received since the FOMC met in June, the Fed made it clear that economic growth so far this year has been " considerably slower" than the Committee had expected.

It also saw that "a deterioration in overall labor market conditions in recent months". The FOMC not only expects the unemployment rate to fall "only gradually," but also for inflation to settle "at levels below those consistent" with its mandate in coming quarters.

Household spending has flattened out, investment in nonresidential structures is "still weak", and the housing sector remains "depressed", said the central bank.

Besides maintaining the key interest rate at near zero low level, the Fed said it will maintain its existing policy of reinvesting principal payments from its securities holdings, which is considered another instrument of easing monetary policy to stimulate the economy.

However, the U.S. economy increased only 0.4 percent in the first quarter this year and 1.3 percent in the second quarter.

The Fed said that temporary factors, such as high energy prices and the Japan crisis, only accounted for "some of the recent weakness" in economic activity.

Ben Bernanke, Chairman of the Fed said earlier this month that he expected the recovery will get more strength in the second half of this year.

Still, many economists predict that the U.S. economy will not grow fast enough to significantly reduce the unemployment rate and other economic challenges.

Moreover, the rating agency Stand & Poor's downgrading of the U. S. sovereign credit last Friday reflected less market confidence in the world's largest economy.

Market observers said that U.S. macroeconomic policy makers have little tools at hand to drive the economy.

According to David Semmens, an economist of the Standard Chartered Bank, the statement "leaves the door open for further quantitative easing (QE) by first quarter in 2012.

The Fed had implemented two rounds of QE, meaning purchasing government bonds since the burst of the financial crisis. The second round QE, a 600-billion-dollar Treasury securities buying program concluded in June after eight months of implementation.

The "super loose" monetary of the Fed has been triggering higher global inflation concern.

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