Fed upbeat on strengthening economy
AP Economics Writer
Vail, CO Colorado
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 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.
Investors showed little reaction to the Fed’s statement. The Dow Jones industrial average was mostly unchanged after the announcement.
Prices for Treasurys slipped further after the Fed’s statement. The yield on the 10-year note, which moves inversely to its price, edged up to 3.77 percent, from 3.75 percent just before the announcement.
The Fed has held its target range for its bank lending rate between zero and 0.25 percent, where it’s remained 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.
Factories and other businesses are operating well below full throttle. Workers aren’t likely to see hefty pay raises any time soon. And companies are wary of jacking up prices because consumers haven’t shown signs of returning to their free-spending ways.
Once the economy is on firm footing, the Fed will need to start boosting rates to prevent inflation and bring policy closer to normal. Economists still think that is months away.
The Fed didn’t provide any clues about when it will start shedding some of its vast portfolio of mortgage securities. That move would tighten credit by sopping up some of the unprecedented amount of money that was pumped into the economy during the financial crisis.
The Fed has bought $1.25 trillion of these securities to drive down mortgage rates and aid the housing market. Its challenge is to sell those assets in a way that doesn’t weaken home prices and jack up mortgage rates. There’s been disagreements within the Fed about the timing and method of such sales.