29 Jan 2009

Fed keeps interest rates down amid steep decline

7:09 pm on 29 January 2009

The US Federal Reserve says industrial production, new housing, employment and consumer and business spending are all in steep decline in America.

The central bank says it is keeping interest rates close to 0%.

The Fed's assessment of the outlook is very downbeat. There was also an implict acknowlegement in its statement that there is a risk of deflation or falling prices, which can aggravate debt problems, the BBC reports.

Deflation becomes more of a risk as interest rates approach zero. It is a serious problem for an economy because people postpone making any large purchases as they believe prices are going to fall, which stifles economic activity even further.

The statement said that the Fed is willing to expand its programme of buying financial securities, including long-term government bonds.

It is a very unusual policy which can help reduce a range of market interest rates for businesses and households.

The approach is sometimes described as printing money, although it does not necessarily involve creating more hard cash. It does add to some measures of the money supply.

Buying government bonds would inject more money into the financial system and hopefully make banks more willing to lend.