Fed vows to keep interest rate low for an 'extended period'

Federal Reserve policymakers yesterday left their benchmark short-term interest rate unchanged in the range of zero to 0.25 percent and once again pledged to keep it low for an "extended period" - retaining the phrase they've used for the past year.

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 question economists still are asking is how long the Fed's extended period of low rates will last. Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi, said some Federal Reserve policymakers have suggested that the phrase equates to three to four Fed meetings, which take place about every six weeks.

"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 Federal Reserve Bank of Kansas City, objected to the pledge on low rates because of concern that they would trigger a round of inflation.

But he has been unable to persuade any of the other nine members of the Federal Reserve's interest-rate committee to come over to his side.

Hoenig's dissent illustrates the Fed's challenge in deciding when to signal that higher rates are coming. He says the economy is strong enough for the Fed to telegraph that rates will rise soon to prevent inflation or asset bubbles. The other members say the low rates will continue to be needed to feed the economic recovery.

The Fed's comment that the labor market is stabilizing marked an improvement from late January, when it said merely that the deterioration was abating.

It also said business spending on equipment and software has risen significantly, also an upgrade from its last assessment.

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, chief economist at PNC Financial Services Group in Pittsburgh. "It's been painted black for so long. Now, it is a lighter shade of gray."

The Fed's target range for its bank lending rate has been at zero to 0.25 percent since December 2008.

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

From yesterday's Federal Open Market Committee statement on interest rates and the economy:

Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit.

Employers remain reluctant to add to payrolls.

Bank lending continues to contract.

Inflation is likely to be subdued for some time.

The committee continues to anticipate that economic conditions . . . are likely to warrant exceptionally low levels of the federal funds rate for an extended period.EndText