US Federal Reserve Keeps Interest Rates at Near-zero

The Federal Reserve tonight pledged to keep interest rates at "exceptionally low levels," and use "all available tools" to jolt the US out of recession, as it warned that the outlook for the world's largest economy has weakened further in recent weeks.

In a statement issued after its regular rate-setting meeting, the Fed said it would leave interest rates unchanged at their historical low of 0-0.25%, and pointed to evidence that the economic outlook is still deteriorating.

"Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly," it said.

The Fed said it was not yet ready to take the more radical step advocated by many economists, of buying government bonds outright to pump more cash into banks - but it could do so, if it thought such measures would be, "particularly effective in improving conditions in private credit markets." One member of the Fed's decision-making committee, Jeffrey Lacker, vote for the Fed to start buying Treasury bills immediately.

Share prices on Wall Street soared, as investors welcomed the Fed's renewed commitment to tackling recession, and the House of Representatives prepared to pass President Obama's ambitious $825bn economic rescue plan.

Although the Fed has exhausted its conventional ammunition of interest rate cuts, it is enacting a series of unconventional measures to drive down interest rates across the economy.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level," the statement said.

The Fed has expanded its balance sheet massively, as it struggles to keep cash flowing to families and businesses. It is buying billions of dollars of assets, including mortgage-backed securities issued by the state lenders Freddie Mac and Fannie Mae, and the "commercial paper" used by many large companies to fund their day-to-day operations.

The Fed chairman describes this approach as "credit easing," targeting specific markets where lending has frozen - contrasting that with the "quantitative easing" pursued by the Japanese government to drag itself out of a decade-long spiral of recession and deflation, which focused on pumping more reserves into the banking system.

Mervyn King, the governor of the Bank of England, recently signaled that Britain, too, is readying a program of "unconventional measures". As a first step, Alistair Darling's latest bailout package for Britain's banks, unveiled last week, included a ?50bn fund to purchase corporate bonds. King is expected to exchange letters with the Chancellor by the end of the week, laying down a framework for exactly how the money will be spent.