The Federal Reserve left the key federal funds rate at the historically low 0-.25 percent level and – more significantly – maintained its “extended period” outlook based partially on weak housing and employment sectors.
In the Fed’s overview of its policy-setting Federal Open Market Committee meeting today, it suggested that economic activity is strengthening with the labor market stabilizing. The FOMC last met in January.
Overall, it described the recovery as “likely to be moderate for a time.”
The target funds rate – the overnight interbank borrowing rate – has been unchanged since December 2008. Banks use it as a benchmark for setting prime interest rates for their best loan customers. A higher funds rate would mean subsequent higher rates on credit cards, home equity lines and mortgages.
The Fed said today household spending is increasing moderately, but remains “constrained by high unemployment, modest income growth, lower housing wealth and tight credit.”
While officials noted that business spending on equipment and software picked up significantly, other signs were concerning.
“…Investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls,” the Fed reported after its meeting.
Moreover, lending by banks continued to contract.
On the more positive side, the Fed said financial markets continue to see improved “functioning.” That outlook makes it certain that the Central Bank will move forward with the closing of its special liquidity facilities launched at the height of the financial crisis.
The Term Asset-Backed Securities Loan Facility, or TALF, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities. The closing for loans backed by all other types of collateral is March 31.
Many economists and futures speculators believe the Fed won’t consider raising the benchmark rate until the end of the year.
As in January’s meeting, the only dissenting vote of the 10 FOMC members was Kansas City Fed President Thomas M. Hoenig, who believes that the extended period posture could pose risks to “longer-run macroeconomic and financial stability.”
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