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US interest rates kept near zero US interest rates kept near zero
(about 2 hours later)
The US Federal Reserve has kept interest rates unchanged but has pledged to "employ all available tools" to revive the economy.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 far as they can go - to a range of zero to 0.25%. 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.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.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."The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth," it said in a statement.
The strategy of a central bank 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. 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.
Deflation becomes more of a risk as interest rates approach zero.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.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.
The news on interest rates boosted US stocks, with the Dow Jones up around 2.5% in afternoon trade in New York. 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 as the US House of Representatives prepares to vote on 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.
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.