Fed says US economy still needs help

MARTIN CRUTSINGER
Last updated 07:53 25/10/2012

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The Federal Reserve says the US economy is improving only moderately and still needs its support to help lower unemployment.

The Fed took no new action after a two-day policy meeting. It wants time to assess whether aggressive steps launched in September will boost growth and job creation in the world's largest economy.

In a statement released after the meeting, the central bank said hiring growth has been slow and the unemployment rate remains elevated. It noted that consumer spending has been a little stronger and the housing market has shown further signs of improvement, but growth in business investment has slowed.

The Fed also said inflation picked up slightly because of higher energy prices but the long-term inflation outlook remains stable.

The statement was approved on an 11-1 vote. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, Virginia, objected for the seventh consecutive meeting. He has been concerned that the Fed's policy steps could lead to higher inflation.

The Fed last month began buying mortgage bonds to try to push long-term interest rates lower and make home buying more affordable. It also said it plans to keep its benchmark short-term rate near zero through mid-2015.

The unemployment rate fell in September to 7.8 per cent, the first time it's been below 8 per cent since January 2009. But the economy is still growing too slowly to spur rapid job growth.

The economy grew at a meagre 1.3 per cent annual rate in the April-June quarter. Economists think it grew slightly faster in the July-September quarter. The government will report its first estimate of third-quarter growth on Friday (US time).

Still, many employers remain wary of hiring, in part because of tax increases and spending cuts set to kick in next year and also because of a slowing global economy.

The bond purchases the Fed launched last month are designed to lower interest rates and cause stock and home prices to rise, creating a "wealth effect." When consumers feel wealthier, they're typically more willing to spend, thereby boosting the economy.

Fed officials reiterated that they intend to hold rates low even after the economic recovery has strengthened. That's a signal that it will keep intervening until the economy grows fast enough to reduce unemployment sharply.

Critics note that interest rates have already been at or near all-time lows. They worry that the Fed's injection of steadily more money into the financial system will eventually ignite inflation or create dangerous bubbles in the prices of stocks or other assets.

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Since the Fed unveiled its latest plans last month, the average rate on a 30-year fixed mortgage has touched 3.36 per cent - the lowest since mortgage buyer Freddie Mac began keeping records in 1971. Cheap loans have helped lift home sales, prices and construction - key pillars of the housing market's gradual but steady comeback.

AP-WF-10-24-12 1836GMT

- AP

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