Fed Keeps Near-Zero Rate, With One Dissent - TheStreet

Fed Keeps Near-Zero Rate, With One Dissent

The Fed maintained its interest-rate target at zero to 0.25% on Wednesday, but Kansas City Fed President Thomas Hoenig dissented with language calling for exceptionally low rates for an 'extended period.'
Publish date:

WASHINGTON (TheStreet) -- The Federal Reserve held its target interest rate near zero as expected Wednesday, but noted a dissenting opinion from one member objecting to language calling for "exceptionally low" rates "for an extended period."

The Fed's rate-setting arm, the

Federal Open Market Committee

maintained the target range for the federal funds rate at zero to 0.25% and "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," according to the FOMC statement.

The FOMC maintained, as expected, language promising to keep interest rates low "for an extended period." Any alteration to the outlook's tone could have implied possible near-term tightening -- a message that would likely rattle investors by increasing market uncertainty.

Coming as a surprise, however, the statement noted a dissenting opinion from Kansas City Fed President Thomas Hoenig, who believed that "economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted."

Doug Roberts, chief investment strategist at ChannelCaptialResearch.com, downplayed the statement's mention of the opposing opinion.

"I don't think it was a big deal that they included the dissenting opinion. It indicates that there probably was some discussion, but they've noted dissenting opinions in the past. This was only one person, so I don't think it necessarily portends that rates will be raised soon," Roberts said.

Although recent economic indicators show signs of improved growth, the global economic recovery still appears fragile. On Tuesday, the International Monetary Fund raised its global growth forecast to 3.9%, from its October projection for growth of 3.1%. At the same time, however, it warned that advanced economies remain sluggish and dependent on government stimulus measures, calling for carefully thought-out strategies to unwind financial supports.

On Wednesday, the Census Bureau said

new home sales fell to a nine-month low in December and mortgage applications, as reported by the Mortgage Bankers Association, slumped 11% last week.

Although recent economic data support subdued inflation pressures -- December's consumer price index inched up 0.1% -- and January consumer confidence rose to a better-than-expected level of 55.9, from 53.6, the unemployment rate remains at 10% and December's nonfarm payrolls report did little to calm job market fears. Even though the Labor Department upwardly revised November's figure to show job growth of 4,000, from initially reported losses of 11,000, December had a bigger-than-expected decline of 85,000. Without a significantly stronger job market, economists see little prospect for a sustainable economic recovery.

Interest rates have been kept in the zero to 0.25% range since December 2008.

Although the FOMC statement was little-changed from its December release, it did carry a slightly more optimistic tone regarding improving economic activity. Since it met in December, the Committee said, "Economic activity has continued to strengthen and the deterioration in the labor market is abating." The statement also noted a pickup in business spending on equipment and software and said that while "bank lending continues to contract, financial market conditions remain supportive of economic growth."

Additionally, the committee swapped out expectations for economic weakness to projections for moderate economic recovery.

The FOMC also maintained its timeline for unwinding from financial supports, citing improved functioning of financial markets but added, "The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth."

Fed Chairman

Ben Bernanke's status has put investors on edge in recent days, as the Senate prepares to vote on his reappointment, ahead of the expiration of his first term on Jan. 31. After some Capitol Hill saber-rattling last week, lobbying by the Obama administration and support from key lawmakers has made it look increasingly likely Bernanke will win reappointment.


Written by Melinda Peer in New York.