A Federal Reserve committee that determines monetary policy is keeping its target for a key short-term interest rate at zero to 0.25 percent, saying economic conditions will likely warrant keeping it at "exceptionally low levels … for some time."

The Fed last month completed a series of 10 consecutive reductions to the federal funds rate, the rate banks charge each other for overnight loans. Before the cuts began in September 2007, the federal funds rate stood at 5.25 percent.

A Federal Reserve committee that determines monetary policy is keeping its target for a key short-term interest rate at zero to 0.25 percent, saying economic conditions will likely warrant keeping it at "exceptionally low levels … for some time."

The Fed last month completed a series of 10 consecutive reductions to the federal funds rate, the rate banks charge each other for overnight loans. Before the cuts began in September 2007, the federal funds rate stood at 5.25 percent.

Some worry that the drastic reduction in the Federal Funds rate will spur inflation or runaway growth — similar cuts after the dot-com bust have been blamed for the housing boom. But in a statement, the Federal Open Market Committee today said that with the economy continuing to weaken, inflationary pressure is expected to "remain subdued" in coming quarters.

The committee anticipates "a gradual recovery in economic activity" later this year, but called the downside risks to that outlook "significant."

Although the Fed has run out of room to make further rate cuts, it continues to implement other programs intended to stimulate economic growth and stabilize financial markets.

With short-term rates cut to the bone, the Fed has three other approaches it can take to address the credit crisis: lending to financial institutions, providing liquidity directly to key credit markets, and buying longer-term securities, Federal Reserve Chairman Ben Bernanke said in a major speech this month at the London School of Economics.

The Fed continues a $600 billion program to purchase debt and mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae, for example, and the committee today said it "stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant."

 

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