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Fed official sees interest rates staying low

With inflation tame and the fragile job market healing, the Federal Reserve has room to hold a main short-term interest rate near rock-bottom levels for some time, a Fed policy-maker said Sunday.
/ Source: The Associated Press

With inflation tame and the fragile job market healing, the Federal Reserve has room to hold a main short-term interest rate near rock-bottom levels for some time, a Fed policy-maker said Sunday.

The federal funds rate, the Fed's main lever for influencing economic activity, now stands at 1 percent, a 45-year low. The funds rate is the interest banks charge each other for overnight loans.

Although many economists agree that the Fed will hold the funds rate steady Jan. 27-28, its first meeting of the year, they differ on the future course of interest rate policy. Some believe the Fed may opt to start inching rates up in June, while others believe the central bank will stay on the sidelines into 2005.

"For now, I believe that the Federal Reserve has the luxury of being patient," Ben Bernanke, a member of the Fed's board of governors, said in a speech to economists meeting in San Diego.

A copy of his remarks was distributed in Washington.

Bernanke is a member of the Federal Open Market Committee, the group headed by Fed Chairman Alan Greenspan that sets interest rate policy in the United States.

"An accommodative monetary policy is needed, in my view, to support the ongoing recovery, particularly in the labor market," Bernanke said. "At the same time, the risks of policy accommodation seem low, as inflation is low and inflation pressures seem quite subdued."

After several false starts, the economy's comeback from the 2001 recession probably began in earnest in the summer of 2003, Bernanke said. "The odds ... have increased that 2003 will be remembered as the year when this recovery turned the corner," he said.

Especially encouraging, he said, is that "finally the business sector appears to have emerged from its funk."

Looking ahead, "we have reason to be optimistic that 2004 will see even more growth and continued progress in reducing unemployment," Bernanke said.

The nation's unemployment rate is at 5.9 percent, down from a high of 6.4 percent seen in the summer. With so many people entering the job market, private economists believe hiring needs to be stronger still to get the unemployment rate steadily moving downward.

Bernanke said private forecasters' estimate that the economy will grow by a brisk 4 percent in 2004 is reasonable. He said he wouldn't be surprised if growth in 2005 was even better.