11/4/2009 5:10 PM
Fed again pledges to hold rates at record-lows
By JEANNINE AVERSA
AP Economics Writer
The Federal Reserve pledged Wednesday to keep a key interest rate at a record low for an "extended period," signaling that the weak economy remains dependent on government help to grow.
The Fed said economic activity has "continued to pick up" and that the housing market has strengthened _ a key ingredient for a sustained recovery.
But Fed Chairman Ben Bernanke and his colleagues warned that rising joblessness and tight credit for many people and companies could restrain the rebound in the months ahead.
"Economic activity is likely to remain weak for a time," they said.
Against that backdrop, the Fed kept the target range for its bank lending rate at zero to 0.25 percent. And it made no major changes to a program to help drive down mortgage rates.
Commercial banks' prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will remain about 3.25 percent, the lowest in decades.
Still, some credit card rates have risen over the past several months. In part, that reflects rate increases by lenders in response to escalating defaults on credit card loans. Lenders also pushed through increases before a new law clamping down on sudden rate hikes for credit card customers takes effect early next year.
On Capitol Hill, the House voted Wednesday to accelerate the enactment date of the new rules to protect consumers from many such surprise changes. Credit card companies would have to comply immediately, rather than starting in February, unless they agreed to freeze interest rates and fees. But the proposal's chances in the Senate are considered dim.
The average rate nationwide on a variable-rate credit card is 11.5 percent, according to Bankrate.com. Lenders charge more and credit card customers pay rates higher than the prime because the debt they run up is riskier.
On Wall Street, the Dow Jones industrial average at first held onto an increase of more than 100 points after the Fed's announcement. But stocks eventually gave up most of their gains in a late-day slump. It wasn't clear how much of a role the Fed's statement played. Some analysts noted that investors are nervous as the release of the government's October jobs report on Friday approaches.
In normal times, the Fed controls only short-term rates. But after the financial crisis erupted, the Fed began buying longer-term Treasuries. Its purchases kept those rates lower than they'd otherwise be.
This is good news for borrowers with auto loans, some student loans, 15- and 30-year fixed-rate mortgages and some adjustable-rate mortgages. But it hurts savers and people dependent on fixed incomes who would normally be enjoying higher yields.
On Wednesday, the Fed stuck with its pledge to keep rates at "exceptionally low" levels for "an extended period." Most analysts don't think the Fed would begin to boost rates until next spring or summer.
Fed policymakers "believe they need to keep rates low to ensure that the recovery doesn't falter," said Joel Naroff of Naroff Economic Advisors.
The central bank hopes low rates will encourage consumers and businesses to boost spending, which would invigorate the recovery. The Fed signaled that it can continue to hold rates low because inflation is all but nonexistent.
The Fed has now entered a new phase: Managing the recovery rather than fighting the worst recession and financial crisis to hit the country since the Great Depression.
The economy began growing again last quarter for the first time in more than a year. But much of that growth came from government-supported spending on homes and cars. The strength and staying power of the recovery are uncertain, especially once government supports are removed.
In such a fragile recovery, a rate increase by the Fed is unlikely anytime soon, said Chris Rupkey, an economist at the Bank of Tokyo-Mitsubishi.
"Growth does not mean a rate hike," Rupkey said.
As with past rebounds, the budding recovery won't likely stop the unemployment rate from rising. The rate, now at a 26-year high of 9.8 percent, is expected to hit 9.9 percent on Friday, when the government releases the unemployment report for October. The jobless rate could rise as high as 10.5 percent around the middle of next year before declining, analysts said.
At some point, once the recovery is firmly rooted, the Fed is likely to start signaling that higher rates are coming. One hint of an eventual rate hike would be the Fed's changing or dropping its pledge to hold rates at record-low levels for an "extended period."
It's a delicate task. Boosting rates and removing supports too soon could short-circuit the recovery. On the other hand, holding rates low and keeping government supports intact too long could unleash inflation.
Though it didn't change a program to help drive down mortgage rates, the Fed did say it will trim its purchases of debt from Fannie Mae and Freddie Mac to $175 billion, from $200 billion, because the supply of that debt has declined.
At its previous meeting in late September, the Fed agreed to slow the pace of a $1.25 trillion program to buy mortgage securities from Fannie Mae and Freddie Mac. It decided to wrap up the purchases by the end of March instead of at year-end. So far, the Fed has bought $776 billion of the mortgage securities.
Its efforts to lower mortgage rates are paying off. Rates on 30-year loans averaged 5.03 percent, Freddie Mac reported last week. That's down from 6.46 percent last year.
Though the Fed will slow its purchases of mortgage securities, rates for home loans should remain low _ in the 5 percent range_ as long as the purchases continue, analysts say.
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(Copyright 2009 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.)
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(Copyright 2009 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.)
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