Fed upshot: Six more months of near-zero short rates?
Steady as it goes, Federal Reserve policymakers declared in their post-meeting statement Tuesday: They left their benchmark short-term interest rate unchanged in the range of zero to 0.25% and once again pledged to keep it low for an “extended period” -- retaining the phrase they’ve used for the last year.
The central bank continued to sound relatively upbeat about the economy, saying the data it looks at suggest that “economic activity has continued to strengthen and that the labor market is stabilizing.”
The Fed also said it would end, on schedule, its program of buying mortgage-backed bonds to help keep home loan rates low. That program will conclude at the end of this month when the Fed’s mortgage bond holdings reach the $1.25-trillion limit it set last year.
Even though the market obviously knows that the end of Fed bond purchases is near, average 30-year mortgage rates have remained around 5% for the last nine weeks, according to the weekly Freddie Mac survey.
As for the Fed’s benchmark short-term rate, just how long will that “extended period” of near-zero rates last?
Chris Rupkey, economist at Bank of Tokyo-Mitsubishi, says some Fed policymakers have suggested that the phrase equates to three to four Fed meetings. If that’s true, “This means the Fed consensus today thinks they will not need to move interest rates until the Sept. 21 meeting,” Rupkey said.
For a second straight meeting, one Fed official dissented in the statement. Thomas Hoenig, president of the Fed’s Kansas City bank, objected to the pledge on low rates.
Hoenig “believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability,” the Fed said.
In other words, he’s worried about inflation. But he has been unable to persuade any of the other nine members of the Fed’s Open Market Committee to come over to his side.
The Fed's full statement follows:
Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.
Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth.
Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
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 Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that 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.
To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.
-- Tom Petruno
Photo: The Fed's headquarters in Washington. Credit: Andrew Harrer / Bloomberg News