Interest rates to hold at record lows

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WASHINGTON --- The Federal Reserve on Tuesday repeated its pledge to hold interest rates at record lows to foster the economic recovery and ease high unemployment.

But the Fed's assessment of the economy at its meeting Tuesday was a bit more upbeat. It said the job market is stabilizing.

It also said business spending on equipment and software has risen significantly. Still, the Fed cautioned that spending by consumers could be dampened by high unemployment, sluggish wage growth, lower wealth and tight credit. And it noted weakness in the commercial real-estate and home-building markets.

"The Fed painted the economy in a slightly brighter shade," said Stuart Hoffman, the chief economist at PNC Financial Services Group. "It's been painted black for so long. Now, it is a lighter shade of gray."

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

Super-low rates benefit borrowers who qualify for loans and are willing to take on more debt. But they hurt people living on fixed incomes who are earning scant returns on their savings.

The Fed's pledge to keep record-low rates for an "extended period" relieved investors. The Dow Jones industrial average finished the day up nearly 44 points.

Prices for Treasurys rose slightly. The yield on the benchmark 10-year Treasury fell to 3.66 percent from 3.68 percent just before the announcement.

The Fed made no changes to a program to drive down mortgage rates and bolster the housing market, even as a government report Tuesday showed housing construction tumbling in February.

Under that program, the Fed is scheduled to end purchases of $1.25 trillion worth of mortgage-securities from Fannie Mae and Freddie Mac at the end of this month. Some analysts fear that once the program ends, mortgage rates could rise. That could weaken the recovery in housing and the overall economy. The Fed has left the door open to extending the program if the economy weakens.

Hoffman thinks 30-year fixed mortgage rates, hovering around 5 percent, could rise to around 5.25 percent to 5.5 percent after the Fed program ends. That increase also would reflect stronger demand for mortgages as people rush to take advantage of a homebuyer tax credit that expires at the end of April.

Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, expressed concern that the "extended period" of low rates could cause a buildup of "financial imbalances." Some analysts took that to mean Hoenig worries that holding rates too low for too long could feed some new speculative bubble in assets such as stocks or commodities.


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