FED SEES RISKS IN LOW RATES POLICY / THE FINANCIAL TIMES ( HIGHLY RECOMMENDED READING )

Fed sees risks in low rates policy

By Sarah O’Connor in Washington

Published: November 24 2009 21:23

Federal Reserve officials have expressed concerns that near-zero interest rates could fuel “excessive risk-taking in financial markets” but believe the possibility of such an outcome is “relatively low”, minutes from its November meeting show.

Both China and Germany warned this month that the weak dollar and the Fed’s policy to keep US interest rates “exceptionally low” for an “extended period” could be laying the groundwork for a new speculative bubble.

The central bank’s Federal Open Market Committee already had discussed this risk, according to the minutes released on Tuesday. In their meeting on November 3-4, the officials “noted the possibility that some negative side-effects might result from the maintenance of very low short-term interest rates for an extended period”.

The minutes said: “While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks.”

The committee members took a fairly sanguine view of the dollar’s recent decline, which they described as “orderly” and linked to improved risk appetite. However, the minutes note that “any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching”.

In the meeting, the committee decided to stick to its interest rate policy, saying the US economy was continuing to improve but that inflation risks were low. The committee members upgraded their forecasts for US growth in 2009 and 2010, but reduced their forecast slightly for 2011. They also lowered their unemployment expectations, forecasting a rate between 9.3 and 9.7 per cent next year, down from a previous forecast of between 9.5 and 9.8 per cent.

The minutes were released after the commerce department said gross domestic product grew at an annual rate of 2.8 per cent in the third quarter, below its first estimate of 3.5 per cent.

Copyright The Financial Times Limited 2009.