Fed Holds Rates Steady, Citing Overseas Threats

Fed Holds Rates Steady, Citing Overseas Threats
By CHRISTINE HAUSER
Copyright by The Associated Press
Published: June 23, 2010
http://www.nytimes.com/2010/06/24/business/economy/24fed.html?hp


The Federal Reserve’s policy-making arm on Wednesday kept short-term interest rates near zero for “an extended period” and said there were challenges to economic growth, including the new impact from economic troubles abroad.

The rate decision by the Federal Open Market Committee, announced at the end of its two-day meeting, was in line with what analysts had expected, taking into account the pressures on consumer spending, an unemployment rate of 9.7 percent and other conditions that factor into the pace of the economic recovery.

Striking an apparently more cautious tone than in previous statements, the Fed introduced new elements into its announcement, slightly changing its wording on growth, and acknowledging the impact of lower prices and an underlying inflation trend.

“It was a little bit more cautious and a little bit more somber in terms of its tone,” said Paul Ballew, a former Federal Reserve economist and now a senior vice president for Nationwide.

As they do every time it meets, economists and investors carefully pick apart the statements of the FOMC after its meetings, even in the absence of action on rates, seeking clues about its intentions and its view of the economy.

While cautioning against reading too much into one statement, Mr. Ballew said that the message from the Fed appeared to be that there was momentum in the economic recovery but also restraints, with excess capacity, a soft labor market, but no near term concerns over inflation.

“They are trying to communicate a balanced point of view,” he said.

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In recent months concerns have sharpened in equity and credit markets that the European debt crisis could worsen, affecting the health of the global economy.

This was reflected in the Fed’s statement, which said: “Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.”

The announcement on the rates did not mark a departure from its previous statement with regard to the rates. As it had after its last meeting in April, the committee voted to keep the benchmark federal funds rate at 0 to 0.25 percent, where it has been since December 2008.

It said it continued to anticipate that economic conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

But one member, Thomas M. Hoenig, voted against the policy action, as he had done before. He said, according to the Fed statement, that he believed the stated plan to keep rates low was no longer warranted and could actually limit the bank’s flexibility to raise rates modestly in the future.

In its statement, the Fed did not change its basic characterization of the pace of economic recovery, which it described as likely to be moderate for a time.

But it slightly changed its language on growth, saying the economic recovery was “proceeding,” whereas in April it said economic activity “has continued to strengthen.”

“It is definitely indicative that the Fed is more concerned about the pace of growth,” said Dan Greenhaus, the chief economic strategist for Miller Tabak & Company.

Inflation in recent months has been largely unchanged, and is well below the Fed’s unofficial target of about 2 percent. While the Fed did not change its language on inflation, which it described as “likely to be subdued for some time,” it acknowledged declining prices for things like energy and other commodities, with trend of lower underlying inflation.

“They definitely took note,” said Mr. Greenhaus.

Many economists have anticipated that interest rates would stay low for the foreseeable future. In addition, they have been pulling back their forecasts for economic growth for the rest of the year.

In Wednesday’s statement, the Fed otherwise portrayed its assessment of the economy as largely the same as its last evaluation in April.

It said the labor market was “improving gradually” and noted that household spending remained constrained by high unemployment, modest income growth, lower housing wealth and tight credit.

Housing starts were described again as being at a “depressed level,” but with no mention, as in April, that they had edged up.

The Fed statement also did not disclose what it would do to reduce the balance sheet it accumulated as it acquired mortgage-backed securities. In order to prop up the housing market, the Fed completed buying $1.25 trillion of the securities in March, but it has since abandoned the practice.

Andrew Neale, portfolio manager at Fogel Neale Partners, speaking before the committee’s statement, said he did not believe the Fed would resume purchases of mortgage-backed securities.

“It will look very weak on the Fed’s part if they discontinue the program and restart it again,” he said.

Mr. Neale said while he did not believe the economy was in for a double-dip recession, it appeared economic growth was much weaker than in the recovery stage of previous recessions.

“Consumers are still saving, not spending,” he said. “The push in the G.D.P. growth has been by businesses rebuilding inventories, and that has to slow down at some point.”

“The Fed is in a tough position,” Mr. Neale added. “They can’t lower rates anymore.”