Saturday, February 20, 2010

Price drop means low interest rates

WASHINGTON — The Federal Reserve seems likely to keep interest rates at record lows for several more months after news Friday that consumer prices excluding food and energy fell in January.
It was the first time such prices have fallen in any month since 1982.

The tame report on consumer prices sent a positive signal to investors and borrowers. It suggested that short-term rates can remain low to strengthen the economic recovery without triggering inflation.

Some have worried that a Fed rate increase affecting consumers and businesses might be imminent, especially after it just raised the rate banks pay for emergency loans.

Friday's news helped reassure financial markets. The Dow Jones industrial average rose about 9 points, or 0.1 percent. Broader stock averages also gained modestly. Bond prices rose, pushing yields lower.

The Fed has kept a key bank lending rate at a record low near zero since December 2008. The goal is to entice consumers and businesses to spend more.

Many analysts said the consumer-price report reinforced their view that the earliest the Fed will start raising rates is the fall.

Some said the central bank might wait until the end of this year or early next year before raising its target for the federal funds rate. That's the rate banks charge for overnight loans.

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