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Fed to hold rates near zero, kickstart economy

Business Materials 28 January 2009 11:19 (UTC +04:00)

The Federal Reserve will resume a key meeting on Wednesday to review options of how to restore U.S. growth, with its traditional interest rate policy tool already lowered almost to zero, reported Reuters.

Policy-makers are expected to focus on credit-easing measures that have already doubled the size of the Fed's balance sheet to over $2 trillion, while assuring investors they can keep Fed borrowing costs very low for a long time.

The Fed is battling a vicious credit crunch sparked by bank losses after the collapse of the U.S. housing market, which toppled the country into a year-long recession.

The Federal Open Market Committee will issue a statement around 2:15 p.m.

Economists say the Fed will hold the target for official borrowing costs in a range of zero to 0.25 percent and repeat a commitment made last month to maintain "exceptionally low levels of the federal funds rate for some time."

More important, the Fed is expected to discuss unconventional measures to improve financial market operations, having already said it is weighing the benefits of major purchases or long-dated U.S. government securities.

Bond markets had rallied strongly on this news, and investors will be watching closely for hints on the scale of any such purchase program or suggestions that one is imminent, as well as other possible initiatives.

The Fed explicitly promised last month that it would explore other options of using its balance sheet to support credit markets and growth.

Not all Fed policy-makers have been comfortable with the aggressive manner in which the balance sheet has grown as the Fed expanded lending to banks, supported the commercial paper market and bailed out Bear Stearns and American International Group.

A split among the policy committee could give rise to dissents in the voting on the statement and policy decision, which is conducted every meeting before they are announced.

FOMC members all have a say in the policy debate, but voting is confined to a more limited group that rotates according to carefully drawn-up rules.

The governors of the Fed Board, who are appointed by the president and confirmed by the Senate, each has a permanent vote, together with the president of the Federal Reserve Bank of New York, whose officers conduct daily open market operations designed to guide the fed funds rate.

Presidents of the 11 remaining regional Fed banks, who are nominated by their respective boards of directors drawn from the local business community and confirmed by the Fed Board, vote according to an annual rotation.

William Dudley, named to head of the New York Fed on Tuesday after his previous boss Timothy Geithner was sworn in as U.S. Treasury secretary, is attending the FOMC meeting for the first timer as a voter.

In addition, Richmond Fed President Jeffrey Lacker, one of the most outspoken anti-inflation hawks on the FOMC who has also voiced concern about the Fed's credit easing policy, is a voter in 2009.

On the other hand, voters this year include three more dovish regional Fed presidents: Janet Yellen from the San Francisco Fed, Atlanta Fed President Dennis Lockhart and Chicago Fed President Charles Evans.

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