Fed Holds Interest Rates Steady; Mortgage Rates to Follow Suit?

The Federal Reserve held benchmark interest rates steady on Wednesday and said it remained concerned on inflation, but it downgraded its assessment of current economic conditions and left its future policy options open.

Amid mortgage industry turmoil, the decision by the U.S. central bank’s Federal Open Market Committee keeps the overnight federal funds rate target at 5.25 percent, a level it hit in June after 17 straight 0.25 percent increases.

In a statement outlining its decision, the Fed dropped a line contained in its last announcement regarding a distinct possibility of further “firming” of monetary policy, saying simply:

“Further policy adjustments will depend on the evolution of the outlook.”

In addition to its decision on interest rates, which strongly influence mortgage rates paid by consumers, the Fed offered a nod to recent signs suggesting the economy is moving ahead only slowly.

“Recent indicators have been mixed and the adjustment in the housing market is ongoing,” the Fed said. “Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.”

Prices for U.S. stocks and government bonds rose, while the dollar fell, as traders in financial markets saw the Fed’s shifts in language opening the door to possible interest rate cuts later in the year.

Still, the Fed said it had not put away its inflation concerns.

“The committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected,” it said.

At its previous meeting in January, the central bank had said growth was looking “somewhat firmer.”

Since then, however, a jump in the default rates for home loans held by less-credit worthy borrowers has sparked worry that mainstream mortgage lenders may be having more trouble, and that it might become more difficult for both households and businesses to borrow.

Beyond the subprime (bad credit mortgage) sector, there has been little to support the view that housing markets were stabilizing, the Fed believes.

A report three weeks ago showed new home sales tumbled almost 17 percent in January, the largest slide in 13 years, while data this week showed that permits for future home building fell in February.

Meanwhile, a sharp sell-off of U.S. stocks late last month added to worries that consumers, already pinched by stagnating or falling home values, might rein in spending, putting an additional drag on the economy.

Against evidence of weaker growth, there was scant reassurance inflation was moderating as the central bank had hoped.

The 12-month change in the so-called PCE price index, the inflation measure preferred by Fed policymakers, moved up to 2.3 percent in January from 2.2 percent in December, above the 1-2 percent comfort zone of many officials.

SOURCE: Reuters