Feds leave key rate unchanged; reports weak economic gains

by The City Wire staff ([email protected]) 87 views 

Members of the Federal Reserve said the national economy is improving and kept the federal funds rate at 0% to 0.25%.

The key rate is essentially the interest rate at which banks may borrow from the Federal Reserve. And because the main banks tie their lending rates to the federal funds rate, mortgage rates, rates on consumer loans and credit card bills should remain at current levels.

The Federal Open Market Committee of the Federal Reserve — the body that sets rates — said in its Wednesday (Nov. 4) report that the economy is improving, with the housing sector seeing gains in recent months. However, the FOMC said in a statement that the

Jeff Collins, an economist with Springdale-based StreetSmart Data, said the FOMC report “mimics” what Wall Street has done in recent days — dropped — because they both saw that the recent GDP growth was primarily tied to government spending.

“And they know that is artificial and is not sustainable,” Collins said. “So, until the economy shows signs of not needing an iron lung or ventilator, the Fed is not in any position to tighten the money supply.”

The FOMC noted that consumer spending, the catalyst to any eventual economic improvement, remains troubled.

“Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit,” the FOMC noted in its report.

Below is the complete FOMC statement released Wednesday afternoon.

Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.

The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.