U.S. Fed to hold rates low as economy slowly improves

A television indicates that the Fed will keep interest rates unchanged on the floor of the New York Stock Exchange in New York on Tuesday

Interest rates will be held in the range of 0-0.25 per cent for an extended period in anticipation of “low rates of resource utilization, subdued inflation trends, and stable inflation expectations”, the United States Federal Reserve’s said

Interest rates will be held in the range of 0-0.25 per cent for an extended period in anticipation of “low rates of resource utilization, subdued inflation trends, and stable inflation expectations”, the United States Federal Reserve’s said today.

Following the Fed’s announcement, equity markets closed at an 18-month high and US Treasury yields declined, according to reports.

The Fed’s Federal Open Market Committee, which last met in January, hinted at improving conditions in the U.S. economy, pointing out that business spending on equipment and software rose “significantly” and household spending expanded moderately. However the latter remained constrained by high unemployment, modest income growth, lower housing wealth, and tight credit, the FOMC cautioned.

The FOMC added a note of explanation on its efforts to bolster the mortgage finance market through credit securities purchases. “To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt,” it said.

Commenting on the overall macroeconomic picture the FOMC said that economic activity continued to strengthen and that “the labor market is stabilizing”. However, it added that employers remain reluctant to add to payrolls. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

Nine out of ten members of the FOMC voted for the FOMC to hold rates low. The one dissent vote came from Thomas M. Hoenig, who held that “continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the build-up of financial imbalances and increase risks to longer-run macroeconomic and financial stability.”

SBI hints interest rates may rise from Q2 next fiscal

The country’s largest lender State Bank of India on Tuesday hinted that lending rates may rise from the second quarter of fiscal 2010 -11, even though there is no immediate pressure on interest rates.

“So far as bank lending rates are concerned, I do not expect lending rates going up before May – June,” SBI Chairman O. P. Bhatt told reporters here.

He said money supply is under pressure, but interest rates will remain stable in immediate future.

“(There is) pressure on liquidity, but no immediate pressure on interest rates,” Mr. Bhatt said.

In its monetary review recently, the RBI asked banks to keep more cash with it, which will shrink money supply by Rs. 36,000 crore from the system.

The apex bank’s move to hike Cash Reserve Ratio (CRR), portion of deposits banks kept in cash with the central bank, by 75 basis points to 5.75 per cent will come into effect from February 13 in two tranches.

Earlier, the largest private sector lender, ICICI Bank CEO and MD Chanda Kochhar had also said that there would be upward pressure on interest rates from the second quarter of this fiscal, because demand for investment would increase.

Mr. Bhatt added that its associate bank SBI Indore will be merged into it by March-end.

The government and the SBI Board has already given in- principle approval to the merger. SBI Saurashtra has already been merged into the parent company.

Mr. Bhatt also said the SBI sees loan expansion at the rate of 16 -18 per cent this fiscal. “We are already at 17 per cent,” he said.

The RBI has also projected credit expansion target at 16 -18 per cent for this fiscal.