WASHINGTON — The Federal Reserve indicated that Europe's debt crisis poses a risk to the U.S. economy and pledged to hold rates at record lows to make sure the recovery stays on track.
Wrapping up a two-day meeting Wednesday, the Fed in a 9-1 decision retained its pledge to hold rates at record-low levels for an “extended period.” Doing so will energize the rebound.
The Fed expressed confidence that the recovery will stay intact despite headwinds from abroad and at home.
But it seemed to strike a more cautious tone. The Fed said the recovery is “proceeding.” That was a bit less upbeat than at its last meeting in April when the Fed said economic activity continued to “strengthen.” The Fed also said the labor market is “improving gradually.”
While not mentioning Europe by name, the Fed said “financial conditions have become less supportive of economic growth ... largely reflecting developments abroad.”
Stock investors showed little reaction to the news. The Dow Jones industrial average was relatively flat after the announcement.
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, for the fourth straight meeting was the sole member to dissent from the Fed's decision to retain the “extended period” pledge.
Hoenig fears keeping rates too low for too long could lead to excessive risk-taking by investors, feeding new speculative bubbles in the prices of stocks, bonds and commodities.
He's also expressed concern that low rates could eventually unleash inflation. And Hoenig says he worries that keeping the “extended period” pledge will limit the Fed's stated “flexibility” to start modestly bumping up rates.