WASHINGTON — The Federal Open Market Committee yesterday held its key policy rate, the federal funds target rate, unchanged at zero to 0.25%, and reiterated that economic conditions warrant “exceptionally low” interest rates “for an extended period,” even though “economic activity has continued to strengthen and that the labor market is beginning to improve.”
For the third straight meeting, Federal Reserve Bank of Kansas City president Thomas Hoenig was the lone dissenter. He believes the continuation of the language “exceptionally low” interest rates “for an extended period” limits the committee’s “flexibility to begin raising rates modestly.”
The Fed completed its $1.25 trillion purchase of mortgage-backed securities on March 31. The program was designed to boost the price of MBS and to keep mortgage rates low. The Term Asset-Backed Securities Loan Facility is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities.
Housing starts “have edged up but remain at a depressed level,” the committee said.
Two reports released last week showed home sales jumped in March, rebounding from declines during the winter months. Existing home sales increased 6.8% and new home sales surged 26.9% in March at a seasonally adjusted annual rate.
Inflation “is likely to be subdued for some time,” the committee said. “Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls.”
In addition, “while bank lending continues to contract, financial market conditions remain supportive of economic growth,” the statement said. “Although the pace of economic recovery is likely to be moderate for a time, the committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.”
