Page last updated at 23:33 GMT, Wednesday, 28 January 2009

US interest rates kept near zero

Federal Reserve Board Building, Washington DC
US rates are expected to remain low for some time

The US Federal Reserve has kept interest rates unchanged but has pledged to "employ all available tools" to revive the economy.

Last month, the central bank cut rates as low as they can go - to a range of zero to 0.25%.

The Fed said it was prepared to use more unconventional monetary policy, such as buying long-term government debt, to improve conditions.

It added that the cost of borrowing was expected to remain low for some time.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth," it said in a statement.

It acknowledged that the economy had continued to deteriorate.

New strategy

The strategy of buying government bonds mirrors the so-called quantitative easing carried out by the Japanese government when it was fighting deflation in the late 1990s and early 2000s.

Graph of US interest rates

Deflation becomes more of a risk as interest rates approach zero.

It is a serious problem for an economy because people postpone making any large purchases as they believe prices are going to fall, which stifles economic activity even further.

In addition to cutting rates to their lowest since records began in 1954, the Fed is already injecting billions of dollars into the banking system and buying debt based on home loans.

Buying government bonds would inject more money into the financial system and hopefully make banks more willing to lend.

Analysts said the Fed's statement went some way to restoring confidence to credit markets.

"Basically they are opening their wallets and are ready to start buying more assets and extend that if necessary," said Kurt Karl, head of economic research at Swiss Re.

The news on interest rates boosted US stocks, with the blue-chip Dow Jones index ending up 2.5% at 8,376 points in New York.

Stimulus planned

The rate decision came shortly before the US House of Representatives approved President Barack Obama's $825bn economic recovery plan.

The two-year scheme includes temporary tax cuts and money for education, infrastructure, renewable energy programmes and health care.

It must now be passed by the Senate.

In addition, new Treasury Secretary Timothy Geithner said he was looking at reforms to the government's $700bn rescue scheme for banks.

There has been speculation that the Treasury was considering setting up a "bad bank" to take toxic assets off bank balance sheets.

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