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Fed stays the course on interest rates

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The Federal Open Market Committee stayed the course Wednesday, reaffirming that the central bank will hold steady on ultra-low interest rates in an effort to spur the economy, while acknowledging that the nation's economic picture is growing brighter.

Since the rate-setting committee's last meeting, indications of growth have resumed, the committee said in its post-meeting statement. "Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated," the statement said. Household spending and the housing sector have strengthened, "but fiscal policy has become somewhat more restrictive," the statement continued, in an apparent reference to the automatic federal budget cuts known as the sequester.

As expected, the Fed's rate-setting committee voted to leave the federal funds rate target at a range of 0 percent to 0.25 percent. That key rate, at which banks make overnight loans to each other to meet reserve requirements, is an indirect lever on interest rates throughout the economy, including credit card rates.

In addition to the summary of the two-day FOMC meeting, the Fed released quarterly economic projections that showed a consistent outlook for the economy and  support for holding short-term rates near zero through 2014.

The committee also affirmed its plans to continue buying Treasury securities and mortgage-backed securities at present volumes to help keep long-term interest rates low and support the home mortgage market.

In a press conference following the FOMC statement, Fed Chairman Ben Bernanke resisted prodding to give a clearer idea when the securities purchases will be stopped, saying that there would need to be sustained and substantial improvement in the job market, and the committee does not have a definite threshold in mind.

But a question from outside the economic realm drew him out. Asked when he had last spoken to someone who was unemployed, Bernanke said, "fairly recently -- I have a relative who is unemployed."

"I come from a small town in South Carolina that has taken a big hit from the recession," he continued. "The home I'd been raised in had just been foreclosed on when I was visiting there." Having said that, he swung back into his economist role and pointed out that the skills lost when people remain out of work are a drag on the entire economy, besides being a hardship for the households that are going without a paycheck.

Martin Schwerdtfeger, senior economist at TD Economics, said there was only a slight change in the Fed's tone from the January meeting, one indicating greater willingness to continue the securities purchase program. He noted that Bernanke more than once mentioned during Wednesday's remarks that the purchases could be increased, instead of decreasing, if conditions warrant.

There have been ups and downs for the economy since the FOMC issued its last monetary policy statement.

Economic boost from homebuilders
Wednesday's statement came after an upbeat report Monday from the important homebuilding sector. The U.S. Census Bureau said that privately owned housing starts were up 0.8 percent for the month of February and nearly 28 percent better than in February 2012. Perhaps more important, building permits were up 4.6 percent above the revised January rate.

"We've certainly had a little more economic momentum recently," said Beata Caranci, deputy chief economist at TD Economics.

The jobless rate has also shown improvement, edging down to 7.7 percent in February from 7.9 percent in January. During his remarks after the FOMC statement, Bernanke said that it would take sustained improvement in more than one measure of job market strength, backed up by broader economic growth, before the Fed will taper off buying securities.

"There's been some improvement in the fundamentals, but at the same time we did hit the sequester," said Gregory Draco, senior economist at IHS Global Insight. The firm's model predicts that the sequester-mandated cuts in federal spending that began March 1 will knock half a percentage point off economic growth this year, even if an agreement is reached in June to spread the cuts over a longer period.

Cyprus a worry, inflation not
Additionally, worries about the euro have flared up again because of problems facing a bailout plan for Cyprus, whose financial crisis could spread if the nation or its banks default on their obligations. The U.S. economy would certainly be impacted if the euro zone's fiscal crisis deepens, economists say.Bernanke said that the effects of the crisis will be felt outside the tiny country only if its crisis becomes a border-crossing contagion, and there are no signs of that starting.

The FOMC has said it is looking to get unemployment back down to about 6.5 percent if it can be done without igniting inflation. Its long-term goal for inflation is set at 2 percent, with a 2.5 percent rate as the trigger point for reversing course and hiking interest rates.

The most recent Consumer Price Index for February showed a 2 percent climb in prices on a year-over-year basis, but economists said core rates of price increases are lower.

"Yes, inflation did spike up a little bit year-over-year, but that was mostly because of gasoline," Draco said. "Gasoline is not going to keep climbing." Increases in real wages remain close to zero, giving the Fed latitude to continue its low-rate policy, he said. In addition, the FOMC uses a different measure of prices than the CPI as its benchmark for tracking inflation.

The Fed's monetary policy designed to get consumers to spend seems to be yielding results in the housing market. Besides the recent increase in homebuilding, surveys show that home prices are improving in most cities as buyers return to the market.

Consumer borrowing increased in the fourth quarter of 2012 for the first time since the Great Recession began in 2008, the Federal Reserve Bank of New York announced earlier this year. Mortgages, car loans and particularly student loans have all shown strength, but the recovery in consumption isn't getting much of a boost from credit card borrowing. Balances were up slightly in the quarter but fell 4 percent for the full year of 2012, reflecting caution from consumers and card-issuing banks, Fed economists say.

The committee voted 11 to 1 to adopt Wednesday's statement.

Published: March 20, 2013


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