Washington, DC, Dec. 9--The Federal Reserve left interest rates at a 45-year low Tuesday and retained its controversial commitment to keep interest rates low for a "considerable period." But policy makers marked down the risks of deflation amid their most upbeat economic assessment in months.
The Fed's monetary-policy committee, as expected, voted unanimously to hold the key federal-funds rate at 1%, where it has been since June. "Output is expanding briskly, and the labor market appears to be improving modestly," it said. It added that "increases in core consumer prices are muted and expected to remain low."
But in a key shift, the Fed altered its previous assertion that the risk of inflation falling further from its already low level--perhaps becoming deflation--outweighed the risk of inflation.
"The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation," the central bank said Tuesday. "However, with inflation quite low and resource-use slack," the Fed said low interest rates "can be maintained for a considerable period." That appears to be a slightly less open-ended commitment than previous statements which simply said rates could stay low for a considerable period.
Bond prices fell and yields rose on the announcement as the Fed's diminished concern about deflation was seen as making a near-term rise in rates more likely.
Analysts had been split on whether the Fed would maintain its promise to keep rates low for a considerable period. Many had also questioned the Fed's continued assertion that risks to growth are balanced and inflation is more likely to fall than rise.
In a survey by the Institute for Supply Management released Tuesday, manufacturing purchasing managers cited inflation as their main concern for next year, followed by energy costs, then health-care costs.
But Fed officials had argued repeatedly in recent months that strong growth is not fueling inflation because high unemployment and idle business capacity still limit businesses' ability to raise prices. And they remain concerned that the economic recovery may stumble, as it has before. The Fed appeared comfortable erring on the side of leaving rates too low for too long because inflation is already near the bottom of many officials' preferred 1% to 2% range.
The shift Tuesday in the central bank's assessment of inflation risks suggests that in recent weeks officials have begun to pay more attention to signs of rising inflation.
The promise to keep rates low for a "considerable period" began as a strategy for nurturing the recovery and eliminating the risk of deflation by checking investors' expectations of when the Fed would tighten monetary policy.
The commitment, first made by Chairman Alan Greenspan in July and repeated by the Federal Open Market Committee after its August, September and October meetings, has worked. Long-term interest rates, such as on mortgages, shot up from late June through early August, but have since leveled off. Though the Fed has kept the commitment, Fed officials may have altered the wording to more explicitly link the commitment to developments in the economy rather than the passage of time.
