More upbeat Fed pledges to maintain record-low interest rates

Federal Reserve Chairman Ben Bernanke said rates can hold where they are because of recent low inflation readings.

Associated Press

Federal Reserve Chairman Ben Bernanke said rates can hold where they are because of recent low inflation readings.

WASHINGTON — The Federal Reserve sounded a more confident note Wednesday that the economy is strengthening, but pledged to hold rates at record lows to make sure it gains traction.

Wrapping up a two-day meeting, the Fed in a 9-1 decision retained its pledge to hold rates at historic lows for an "extended period." Doing so will help energize the recovery.

The Fed offered a more upbeat view of the economy even as it noted that risks remain. It said the job market is "beginning to improve," an upgrade from its last meeting in mid March. It observed then that the unemployment situation was merely "stabilizing."

The Fed also noted that consumer spending has "picked up," an improvement from its last observation that spending was expanding at a "moderate pace."

Even with the improvements, the Fed said there was reason to be cautious. High unemployment, sluggish income gains and tight credit are still dampening consumer spending, a major contributor to economic activity. Commercial real estate remains fragile. And though housing activity has edged up, it is still at depressed levels. Bank lending continues to shrink.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, for the third straight meeting opposed the Fed's decision to retain the "extended period" pledge.

Hoenig has said he fears that keeping rates too low for too long could lead to excessive risk-taking by investors, feeding new speculative bubbles in the prices of stocks, bonds and commodities.

He's also expressed concern that low rates could eventually unleash inflation. And Hoenig says he worries that keeping the "extended period" pledge will limit the Fed's stated "flexibility" to start modestly bumping up rates.

The Fed has held its target range for its bank lending rate between zero and 0.25 percent, where it has been since December 2008. In response, commercial banks' prime lending rate, used to peg rates on certain credit cards and consumer loans, has stayed about 3.25 percent. That's its lowest point in decades.

Record-low rates serve borrowers who qualify for loans and are willing to take on more debt. But they hurt savers. Low rates are especially hard on people living on fixed incomes who are earning scant returns on their savings.

Fed Chairman Ben Bernanke and his fellow colleagues said they have leeway to hold rates at record lows because inflation is likely to stay subdued because of "slack" in the economy.

March vs. April

A comparison of the Federal Reserve's statement on the economy and its policy positions from its last meeting on March 16 and the meeting that concluded Wednesday.

LABOR MARKETS

. March: "The labor market is stabilizing."

. April: "The labor market is beginning to improve."

ECONOMIC CONDITIONS

. March: "Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth and tighter credit."

. April: "Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit."

HOUSING

. March: "Housing starts have been flat at a depressed level."

. April: "Housing starts have edged up but remain at a depressed level."

INTEREST RATES

. March: Leaves federal funds rate unchanged at record low of zero to 0.25 percent, where it has been since December 2008, and repeats pledge to keep rates "exceptionally low" for "an extended period."

. April: Leaves federal funds rate unchanged and once again repeats pledge to keep rates "exceptionally low" for "an extended period."

INFLATION

. March: "Inflation is likely to remain subdued for some time."

. April: "Inflation is likely to remain subdued for some time."

More upbeat Fed pledges to maintain record-low interest rates 04/28/10 [Last modified: Wednesday, April 28, 2010 9:12pm]

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