Benchmark Short-Term Rate To Stay Low For Extended Period

Federal Reserve policymakers left their benchmark short-term interest rate unchanged in the range of zero to 0.25% and once again pledged to keep it low for an “extended period”.

The central bank continued to sound relatively upbeat about the economy, saying the data it looks at suggest that “economic activity has continued to strengthen and that the labor market is stabilizing.”

The Fed also said it would end, on schedule, its program of buying mortgage-backed bonds to help keep home loan rates low. That program will conclude at the end of this month when the Fed’s mortgage bond holdings reach the $1.25-trillion limit it set last year.

Even though the market obviously knows that the end of Fed bond purchases is near, average 30-year mortgage rates have remained around 5% for the last nine weeks.

Chris Rupkey, economist at Bank of Tokyo-Mitsubishi, says some Fed policymakers have suggested that the phrase equates to three to four Fed meetings. If that’s true, “This means the Fed consensus today thinks they will not need to move interest rates until the Sept. 21 meeting,” Rupkey said.

For a second straight meeting, one Fed official dissented in the statement. Thomas Hoenig, president of the Fed’s Kansas City bank, objected to the pledge on low rates.

Hoenig “believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability,” the Fed said. Summed up, he’s worried about inflation…

*Source: LA Times

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