U.S. Fed keeps key rate at zero

The U.S. Federal Reserve Board surprised no one Wednesday by leaving its short-term interest rate at zero in the central bank's latest-rate decision.

The Federal Open Market Committee did not touch its target rate for the federal funds — the interest rate it charges chartered banks that need short-term cash — at between 0 and 0.25 per cent. The fed funds rate is seen as a guidepost for other lending institutions in what they charge borrowers.

With the U.S. economy listing badly, interest rates need to stay low to stimulate economic growth, the Federal Reserve said.

"The committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time," the FOMC said in a press release.

With its main interest rate already at zero, however, the Federal Reserve needs to use other financial weapons besides rate cuts to boost the economy, experts said.

"If long-end yields continue surging higher, the Fed will undoubtedly eventually step in and start buying, but such an announcement probably wouldn’t come in an FOMC statement," said Ted Wieseman, a Morgan Stanley economist focusing on U.S. fixed income markets."

Still, after months of rates cuts, the U.S. economy does not appear to be responding as anticipated to the Federal Reserve's manoeuvres.

"Information received since the committee met in December suggests that the economy has weakened further," the Fed said.

So the Federal Reserve plans to use other methods to improve U.S. growth, namely by providing credit. The bank has injected trillions in new money into the national financial system through special auctions and accepting new types of loan security.

One reason that the U.S. interest rate reductions are not having an effect as quickly as expected is that lenders who put money out for a longer term have not really changed their rate structure much.

For example, U.S.-based Wells Fargo Inc. noted a 15-year fixed mortgage had an interest rate of 4.80 per cent in January, versus a 4.95 per cent rate for the same mortgage 12 months earlier.