March 16, 2010 in Business

Fed holds rates at record lows to foster recovery

Associated Press
 

WASHINGTON — The Federal Reserve on Tuesday repeated its pledge to hold interest rates at record lows to foster the economic recovery and ease high unemployment.

But the Fed’s assessment of the economy was a bit more upbeat. It said the job market is stabilizing. That was an improvement from its January statement, when it said the deterioration in the labor market was abating.

It also said business spending on equipment and software has risen significantly, also an upgrade from its last assessment. Still, the Fed cautioned that spending by consumers could be dampened by high unemployment, sluggish income growth, lower wealth and tight credit.

The Fed’s decision to pledge again to keep record-low rates for an “extended period” initially pleased investors. The Dow Jones industrial average gained about 30 points. Later, the Dow slipped to a gain in the single digits, where it stood before the announcement.

Prices for Treasurys rose slightly. The yield on the benchmark 10-year Treasury fell to 3.66 percent from 3.68 percent just before the announcement.

The Fed made no changes to a program to drive down mortgage rates and bolster the housing market, even as a government report Tuesday showed housing construction tumbling in February.

Under that program, the Fed is scheduled to end its mortgage-securities purchases from Fannie Mae and Freddie Mac at the end of this month. Some analysts fear that once the program ends, mortgage rates could rise. That could weaken the recovery in housing and the overall economy. The Fed has left the door open to extending the program if the economy weakens.

Its decision to keep record-low rates for an “extended period” — thought to mean at least six more months — again drew one dissent. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, for a second straight meeting opposed keeping the yearlong pledge.

Hoenig’s dissent illustrates the Fed’s challenge in deciding when to signal that higher rates are coming. Hoenig thinks the economy is strong enough for the Fed to telegraph that rates will rise soon to prevent inflation.

But Fed Chairman Ben Bernanke and other colleagues think the low rates will continue to be needed to feed the economic recovery. They held the Fed’s target range for its bank lending rate at zero to 0.25 percent, where it’s been since December 2008. In response, commercial banks’ prime lending rate, used to peg rates on certain credit cards and consumer loans, has remained about 3.25 percent — its lowest in decades.

Super-low rates benefit borrowers who qualify for loans and are willing to take on more debt. But they hurt savers. Low rates are especially hard on people living on fixed incomes who are earning measly returns on savings.

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