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Published: Thursday, 6/24/2010

Fed keeps interest rates at record low


WASHINGTON - The Federal Reserve struck a more cautious tone about the U.S. economic recovery's strength, indicating Europe's debt crisis poses a risk.

Wrapping up a two-day meeting yesterday, the Fed decided 9-1 to keep holding rates at record-low levels for an "extended period." Doing so will energize the rebound, it believes.

The Fed expressed confidence that the recovery will stay intact despite headwinds from abroad and at home. But Chairman Ben Bernanke and his colleagues offered a slightly more reserved outlook than the last time they convened.

The Fed said the economic recovery is "proceeding." That was a bit less upbeat than its view in April, when the Fed said economic activity continued to "strengthen." The Fed also said the labor market is "improving gradually."

While not naming Europe, the Fed said "financial conditions have become less supportive of economic growth ... largely reflecting developments abroad."

Stock investors had little reaction. The Dow Jones industrial average fell about 10 points after being relatively flat before the announcement, but finished up 5 points for the day at 10,298.44.

The Standard & Poor's 500 index and the Nasdaq composite index each finished down about a third of a point.

The decision to keep rates at record lows boosted demand for safe-haven assets like Treasurys, sending interest rates lower.

For the fourth-straight meeting, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, was the sole member to dissent from the Fed's decision to retain the "extended period" pledge.

He fears keeping rates too low for too long could lead to excessive investor risk-taking and feed new speculative bubbles in the prices of stocks, bonds, and commodities. He's also concerned low rates could unleash inflation.

The Fed left a key bank lending rate at between zero and 0.25 percent. The rate has remained at that level since December, 2008.

That means rates on certain credit cards, home equity loans, some adjustable-rate mortgages, and other consumer loans will be kept low. Commercial banks' prime rate would stay about 3.25 percent, the lowest in decades.

Low rates serve borrowers but hurt savers. Low rates are especially hard on people living on fixed incomes who are earning scant returns on their savings.

Still, if the rates spur Americans to spend more, they would help invigorate the economy. That's why the Fed maintained its pledge, in place for more than a year, to keep rates at record lows for an "extended period."

Because the fragile recovery is more vulnerable to shocks from home and overseas, economists increasingly say the Fed probably won't start boosting rates until next year - or possibly into 2012.

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