As expected, the U.S. Federal Open Market Committee decided to keep its target for the federal funds rate at 1%. In its accompanying policy statement, the Fed suggests that rates will stay low for a while, due to possible deflation risks.

“The committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal,” it says. “In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. The committee judges that, on balance, the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future. In these circumstances, the committee believes that policy accommodation can be maintained for a considerable period.”

Overall, it said, “The committee continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the inter-meeting period confirms that spending is firming, and the labor market appears to be stabilizing. Business pricing power and increases in core consumer prices remain muted.”

Most economists expect the Fed to stand pat on interest rates until well into 2004.

RBC Financial says that the Fed provided a very strong signal to markets that it expects monetary policy to remain accommodative for a while yet. “In backing this statement, the committee noted that upside and downside risks to growth over the next few quarters are roughly equal, but that the small risk of a drop in inflation outweighs the risk of higher inflation. By pointing to strong productivity growth, highly stimulative policy conditions, stabilizing labour markets and firming spending, the committee provided a clear signal that it has no intention of removing significant policy stimulus anytime soon,” RBC says. “This continues to mean that short-term interest rates in the United States will remain very low for some time yet. The rest of today’s indicators generally support the view that the U.S. economy is on the rebound.”

Bank of Montreal observes that, except for one phrase, the press statement was an exact duplicate of the one that accompanied the September 16 rate announcement. “In light of the upturn in September payrolls, today’s statement noted that the labour market ‘appears to be stabilizing’. This represented an upgrade from the September assessment of “weakening’. The Fed also reaffirmed that ‘spending is firming’.”

“Even in the face of strong growth, rates will remain low until some of the slack in the economy is depleted and the Fed is confident about the sustainability of the recovery. In our view, rates will likely remain on hold until May 2004. However, should the recovery stumble, the Fed would be inclined to reduce rates,” BMO says.

The next FOMC meeting is scheduled for December 9.