Cleaning & Restoration Breaking News

Fed Lays Groundwork to End Low Rate Vow

WASHINGTON (Reuters) - Federal Reserve officials have laid the groundwork to jettison an unusual vow to keep interest rates low, but whether they will take that step at their next meeting is far from clear, Fed watchers say.

After each of its last three policy meetings, the Fed has said it expected to keep rates low for "a considerable period," a surprisingly explicit, if still ambiguous, commitment from a central bank historically loath to tie its hands in any way.

The pledge first surfaced when Fed Chairman Alan Greenspan testified to Congress in July, as policymakers worried that long-term interest rates might rise before the economy had fully found its feet.

Having cut overnight rates to a 1958 low of 1 percent in late June, the Fed's regular ammunition against economic weakness was running out and officials were worried a slowing rate of inflation was raising the risk of falling prices.

But some Fed officials were never comfortable with a pledge that appeared to put a time frame on interest-rate action, as minutes of a mid-September Fed meeting made clear.

"Members generally agreed that the (Fed) should not usually commit itself to a particular policy stance over some pre-established, extended time frame," the minutes said.

At that meeting, a decision was made to retain the statement out of concern its abandonment might suggest a sharp shift in policymakers' views on the economy.

"I think that you can tell by the body language among Fed officials that they would like to find a way to ease their way out of that particular reference," said David Rosenberg, chief North American economist at Merrill Lynch.

"The real question is what to replace it with," he said, adding that the timing of any shift in rhetoric was uncertain.

Economists say Fed officials have carefully underscored in recent weeks their belief that the economy has a long way to go to soak up excess slack and neutralize the risk of inflation slowing further.

Having laid out a framework for the likely course of monetary policy, officials have less need to rely on a specific commitment to keep market fears of imminent rates hikes at bay, Fed watchers said.

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