Fed holds line on interest rates
By Fred O. Williams | Published: May 1, 2013
With inflation declining and unemployment stubbornly high, the Federal Reserve's rate-setting committee voted Wednesday to leave its ultra-low interest rate policy unchanged.
"Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices," the Fed's post-meeting statement said.
The Federal Open Market Committee voted to leave the federal funds rate target at a range of 0 percent to 0.25 percent. The federal funds rate is the rate at which banks make overnight loans to each other and has a profound influence on interest rates throughout the economy, including credit cards.
The decision comes as jobs are lagging and inflation remains low. However, the values of stocks and real estate are rising sharply, increasing concern that the Fed's cheap-money policy could contribute to another bubble in investment prices.
"The indicators are going in different directions," said George Mokrzan, director of economics at Huntington National Bank. Economists expect that there will be more resistance to maintaining current low interest rates as the year continues.
The Fed has made its general course settings clear. Rates will remain at their exceptionally low levels as long as the unemployment rate remains above 6.5 percent, with expected inflation not higher than 2.5 percent, which is one-half a percentage point above the Fed's long-term goal.
With the target short-term rate widely expected to remain at near-zero levels, attention focused on the Fed's plans to continue buying Treasury securities and mortgage-backed securities -- a policy aimed at keeping longer-term interest rates low and supporting the housing market. The FOMC said it will continue to buy the securities at the current pace of $85 billion per month. However, it also said that it is prepared to increase the pace of its purchases depending on the health of the economy, as well as decrease them.
"That could turn out to be a very versatile statement," said Richard Moody, chief economist for Regions Bank. The assumption has been that the Fed would only consider slowing the purchases from current levels.
Recent readings from the housing sector have shown robust strength. Private housing starts rose 7 percent during March, and the pace of home-building was about 47 percent higher than in March 2012, the U.S. Department of Housing and Urban Development said. Rising demand for housing is running up costs for building materials and making available workers scarce, according to the National Association of Homebuilders. And homeowners are getting a boost from the strongest increase in home values since 2006, according to the widely watched Case-Shiller index.
A parallel story is unfolding in the stock market. Market indexes have marched upward recently, fueling concerns that the Fed's cheap-money policy could help over-inflate the prices of investments. The S&P 500 index ended April at a record high near 1,600. Low interest rates boost stocks by making their returns look better when compared with bonds and other interest-paying investments.
But joblessness remains relatively high, at 7.6 percent in March, and the number of people looking for work actually declined. That, combined with recent measures of inflation running cool, gives the Fed room to keep pushing on the monetary accelerator.
"I think they have some moral concerns about the stock market, but not big ones," said Daniel Seiver, chief economist for Reilly Financial Advisors. Participation in stocks remains limited, with many small investors still on the sidelines. "For a real scary bubble, I think you would need to see the public getting in," he said.
Earlier this week, the U.S. Commerce Department reported that the price index for consumer spending actually fell in March by 0.1 percent, partly because of changes in volatile food and energy prices. Other readings support the notion that prices are staying put for a while. "Inflation nearly vanished," the March Chicago purchasing managers report said.
While the job-producing economy is under pressure, the Fed faces narrower options as the cheap money policy continues. As the Federal deficit declines, Fed purchases of Treasury bonds make up an increasing slice of total sales, running the risk of distorting the market, said Moody of Regions Bank.
"There's a lot of fiscal policy headwinds," Mokrzan said. The federal budget cuts known as the sequester are starting to hit government workers and contractors in the pocketbook, adding to the pain felt by all workers in January with the expiration of payroll tax breaks. The Fed toughened its language about the budget-cutting somewhat in the latest statement, saying that "fiscal policy is restraining economic growth."
Earlier article: Fed stays the course on interest rates
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