The Producer Price Index (PPI) saw its biggest drop in seven months in February, fueling the U.S. Federal Reserve's argument that interest rates can remain low "for an extended period" without yet facing dangerous inflationary pressures.
Wholesale prices were down a seasonally adjusted 0.6% in February, the Labor Department reported today (Wednesday), a day after the Fed's one-day policy meeting where it reiterated the need to encourage economic growth through low interest rates.
The central bank's position to keep the federal funds rate at a record low range of zero to 0.25% since December 2008 has sparked inflation concerns among many investors. However, proof of tame inflation buys the Fed more time in deciding when to continue with its "exit strategy" and pull the trigger on a rate hike. The Fed has remained firm on its stance that there is no evidence of rising inflation due to low interest rates.
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Producer Price Index Drop Supports Fed's Position on Keeping Low Interest Rates
Fed Maintains Monetary Policy but Eyes Inflation in the Offing
The Federal Open Market Committee (FOMC) today (Wednesday) announced that it would leave its benchmark federal funds rate at a record low range of 0-0.25% for an extended period, despite recent signs that the U.S. economic recovery is accelerating.
Most analysts anticipate the Fed will maintain its loose monetary policy well into 2010, as the economic recovery, while gathering steam, remains fragile. Job losses abetted in November and the unemployment rate slid to 10% from a 26-year high of 10.2% in October. And while construction of new homes rose to an annual rate of 574,000 last month - 8.9% above the October rate 527,000 - that's still 12.4% below the 655,000 rate reached in November 2008.
"Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months," the FOMC said. However, "businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls."
Most analysts anticipate the Fed will maintain its loose monetary policy well into 2010, as the economic recovery, while gathering steam, remains fragile. Job losses abetted in November and the unemployment rate slid to 10% from a 26-year high of 10.2% in October. And while construction of new homes rose to an annual rate of 574,000 last month - 8.9% above the October rate 527,000 - that's still 12.4% below the 655,000 rate reached in November 2008.
"Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months," the FOMC said. However, "businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls."
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