Fed to keep interest rate low

WASHINGTON — The Federal Reserve restated on Wednesday its intention to keep the benchmark interest rate near zero for an "extended period" and said the labor market is "beginning to improve."

"Economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period," the Federal Open Market Committee said in a statement in Washington.

Chairman Ben Bernanke is contending with an economy that's been growing for almost a year without an increase in inflation or a decline in unemployment below 9.7 percent. While consumer spending is recovering along with business investment, credit to households remains tight. A surge in corporate profits last quarter was led by demand from overseas and lower labor costs, according to results from Standard & Poor's 500 companies that have reported earnings this month.

"With substantial resource slack continuing to restrain cost pressures and longer term inflation expectations stable, inflation is likely to be subdued for some time," the FOMC said.

Officials also said growth in household spending has "picked up recently." The job market is "beginning to improve," according to the statement. Last month, the FOMC said the labor market "is stabilizing."

Central bankers have kept the benchmark lending rate in a range of zero to 0.25 percent since December 2008. Their purchases of $1.25 trillion in mortgage-backed securities, which ended last month, boosted the balance sheet to a record $2.34 trillion, creating concern among some officials that aggressive monetary stimulus could lead to imbalances later.

Kansas City Fed President Thomas Hoenig dissented for the third straight meeting. He said that "continuing to express the expectation of exceptionally low levels of the federal funds rates for an extended period was no longer warranted because it could lead to the buildup of future imbalances and increase risks to longer-run macroeconomic and financial stability" and limiting the ability to increase rates modestly.

Gross domestic product grew at a 3.3 percent annual pace in the first quarter, according to the median forecast of economists surveyed by Bloomberg News ahead of an April 30 report from the Commerce Department. After a 5.6 percent expansion in the prior three months, such growth would mark the best back-to-back performance since the last six months of 2003.

Economists have raised forecasts from earlier this month as reports showed consumer spending climbed, inventories rose and businesses invested in new equipment. The median estimate of analysts polled from April 1 to April 8 called for a 3 percent growth rate.

Retail sales increased 1.6 percent last month, more than anticipated and the biggest gain in four months, according to figures from the Commerce Department. Stocks of companies that rely on discretionary spending are up. Shares of Chipotle Mexican Grill ,a Denver-based Mexican restaurant chain, are up about 55 percent year-to-date. Shares of Starbucks , based in Seattle, have risen 14.5 percent.

For all the positive news, economists surveyed by Bloomberg News expect non-farm payrolls to rise by just 175,000 this month, not enough to lower the unemployment rate from 9.7 percent, where it stood in March.

Slack in labor markets and resulting weak wage pressures have held down consumer prices. The consumer price index minus food and energy rose at a 1.1 percent pace for the 12 months ending March, down from 1.3 percent in February.

"The Fed is going to be pretty cautious until we start seeing 300,000 gains in private monthly payrolls," said Julia Coronado, senior U.S. economist at BNP Paribas in New York. "Without a stronger turn into job growth, and without credit creation, it doesn't look like we would accelerate much from here."