Fed to leave interest rates near zero a little longer

By Neil Irwin
Washington Post Staff Writer
Wednesday, March 17, 2010; A16

The Federal Reserve stood by its policy of keeping interest rates at rock-bottom levels for the foreseeable future at its policymaking meeting Tuesday even as central bank officials took a more positive tone about the economy.

The Federal Open Market Committee left its target for short-term interest rates near zero, where it has been for the past 15 months. Fed officials also repeated language from previous statements that rates are likely to remain "exceptionally low" for an "extended period," which they have said means at least six more months.

The Fed will also go forward with a plan to end its support for the mortgage market at the end of March. By then, the central bank will have completed the purchase of $1.25 trillion in mortgage-backed securities, a key factor in keeping interest rates low for those buying a house.

On balance, the Fed's assessment of the economy seemed slightly better than it had been at the last policy meeting, in late January. Recent data suggest that "the labor market is stabilizing," the statement accompanying the rate decision said. At the January meeting, the Fed had said that "deterioration in the labor market is abating."

The unemployment rate has edged down in recent months to 9.7 percent, and forecasters expect the nation to have added jobs in March.

Similarly, the officials noted in the statement released Tuesday afternoon that "business spending on equipment and software has risen significantly," again an upgrade from January, when they said that such spending "appears to be picking up."

But the economic assessment was not universally sunny. Fed leaders said investment in commercial real estate is declining, housing starts have been "flat at a depressed level" and employers have been slow to hire. The number of housing starts fell 5.9 percent last month, the Commerce Department said Tuesday, a number dragged down in part by snowstorms. The drop was steepest among "multi-family" construction, such as apartment buildings.

Even with the generally brighter signs about the economy, there was little reason to think that the Fed is inclined to raise interest rates soon.

With unemployment high and inflation appearing to be a distant threat, most Fed leaders are in no hurry to raise rates. That said, if economic data come in particularly strong over the next weeks, the Fed would probably discuss at its late April meeting changing the language in its statement that rates will stay "exceptionally low" for an "extended period."

"The Fed upgraded its assessment of the labor market but didn't follow through on that upgrade by indicating that it would be proceeding with its exit strategy anytime soon," said Dean Maki, chief U.S. economist at Barclays Capital. "Once the labor market is improving substantially, the Fed is likely to become less comfortable with guaranteeing six months of close to zero percent rates. That puts a lot of importance on upcoming economic data."

The stock market rose for the day, led in part by the Fed's continued commitment to its low interest-rate policy. The Standard & Poor's 500 index closed up 0.8 percent.

Kansas City Fed President Thomas M. Hoenig dissented from the Fed's decision, as he did at the January policymaking meeting. The Fed statement contained more detail on his rationale this time, saying that Hoenig thinks that keeping the promise to leave rates low for an extended period "could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial imbalances."

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