Fed Cites Soft Growth in Keeping Rates Low - TheStreet

WASHINGTON (TheStreet) -- The Federal Reserve's policymaking arm kept the target fed funds rate unchanged and retained language promising to keep interest rates low "for an extended period," on Wednesday, citing financial conditions that "have become less supportive of economic growth on balance, largely reflecting developments abroad."

Market expectations were overwhelmingly for an unchanged target interest rate, which has remained at the zero to 0.25% level since Dec. 16.

In a

statement that followed a two-day monetary policy meeting, the Federal Open Market Committee noted declining energy and commodity prices and weak underlying inflation.

The committee "continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period," members said.

"What's significant is that the committee is now formally acknowledging that rate increases are more likely to occur much later based on their acknowledgement that the recovery is occurring at a slower pace," said Lawrence Creatura, portfolio manager at Federated Investors.

"They explicitly stated that current conditions are less supportive of growth. They did blame it on Europe to some degree, although I suspect they implied, without explicitly saying so, that they've been keeping an eye on our own macroeconomic data, which has been cooling."

A recent spate of weaker-than-expected economic data has called the strength of economic recovery into question. May's nonfarm payrolls report raised concerns about private sector job creation since temporary Census hiring accounted for the bulk of the month's growth and last week, an unexpected jump in initial jobless claims furthered fears about the U.S. job market.

Housing has been another area of concern as May existing-home sales unexpectedly fell, by 2.2%, on Tuesday, and data out earlier on Wednesday showed a 32.7% drop in May new-home sales.

Once again, Kansas City Fed President Thomas Hoenig was the only member to vote against the policy action -- as he has during the FOMC's three previous meetings. He continues to believe that expectations for a long period of extremely low rates could not only result in future imbalances and possibly upset longer-term macroeconomic and financial stability, but that it also imposes limitations on the Committee, making it more difficult for them to eventually begin raising rates.

-- Written by Melinda Peer in New York

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