Fed holds rates at record low to fuel recovery
WASHINGTON
The Fed noted that the economy is growing, however slowly. And
turning more upbeat, it pointed to a slowing pace of layoffs.
Still, Fed Chairman Ben Bernanke and his colleagues gave no
signal that they're considering raising rates anytime soon. They
noted that consumer spending remains sluggish, the job market weak,
wage growth slight and credit tight. Companies are still wary of
hiring, they said.
Against that backdrop, the Fed kept its target range for its
bank lending rate at zero to 0.25 percent, where it's stood since
last December. And it repeated its pledge, first made in March, to
keep rates at "exceptionally low levels" for an "extended
period."
In response, commercial banks' prime lending rate, used to peg
rates on home equity loans, certain credit cards and other consumer
loans, will remain about 3.25 percent. That's its lowest point in
decades.
Super-low interest rates are good for borrowers who can get a
loan and are willing to take on more debt. But those same low rates
hurt savers. They're especially hard on people living on fixed
incomes who are earning measly returns on savings accounts and
certificates of deposit.
Michael Darda, chief economist at MKM Partners, predicted that
rates would stay where they are for most of next year.
"We believe the Fed is essentially out of the picture until
late 2010 or early 2011," Darda said. The Fed's "optimism was
constrained by a long list of caveats," he added.
Noting the stabilized financial markets, the Fed said it expects
to wind down several emergency lending programs when they are set
to expire next year. That seemed to strike a confident note that
the Fed thinks it can gradually lift supports it provided at the
height of the financial crisis.
The central bank made no major changes to a program, set to
expire in March, to help further drive down mortgage rates.
The Fed in on track to buy a total of $1.25 trillion in mortgage
securities from Fannie Mae and Freddie Mac by the end of March. It
has bought $845 billion so far. It's also on pace to buy $175
billion in debt from those groups under the same deadline. So far,
the Fed has bought nearly $156 billion.
Its efforts to lower mortgage rates are paying off. Rates on
30-year loans averaged 4.81 percent, Freddie Mac reported last
week. That's down from 5.47 percent last year.
The Fed said it has leeway to hold rates at super-low level
because it expects that inflation will remain "subdued for some
time."
Fed policymakers repeated their belief that slack in the economy
-- meaning plants operating below capacity and the weak employment
market -- will keep inflation under wraps.
A government report out Wednesday showed that inflation is in
check despite a burst in energy prices. Energy prices, however, are
already in retreat.
Bernanke, who's seeking a second term as Fed chief, has made
clear his No. 1 task is sustaining the recovery. Last week, he and
other Fed officials signaled they are in no rush to start raising
rates.
At the same time, Bernanke has sought to assure skeptical
lawmakers and investors that when the time is right, he's prepared
to sop up all the money. Some worry that the Fed's cheap-money
policies will stoke inflation.
Some encouraging signs for the economy have emerged lately. The
economy finally returned to growth in the third quarter, after four
straight losing quarters. And all signs suggest it picked up speed
in the current final quarter of this year.
The nation's unemployment rate dipped to 10 percent in November,
from 10.2 percent in October. And layoffs have slowed. Employers
cut just 11,000 jobs last month, the best showing since the
recession started two years ago.
Still, the Fed predicts unemployment will remain high because
companies won't ramp up hiring until they feel confident the
recovery will last.
Consumers did show a greater appetite to spend in October and
November. But high unemployment and hard-to-get credit are likely
to restrain shoppers during the rest of the holiday season and into
next year.