With inflation declining and unemployment stubbornly high, the
Federal Reserve's rate-setting committee voted Wednesday to leave
its ultra-low interest rate policy
"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
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
Recent readings from the housing sector have shown robust
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
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
Earlier this week, the U.S. Commerce Department reported that
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
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."
Fed stays the course on interest rates