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Fed Holds Key Interest Rate Near Zero

It's the same old song echoing from the Federal Reserve's chambers â€" the same guarded outlook and careful phrasing that the markets have been hearing for several months now.


At the conclusion of its monetary policy meeting on Tuesday, the Federal Reserve board voted to continue to hold its benchmark federal funds interest rate at 0 to 0.25 percent, and reasserted that ""economic conditions will warrant exceptionally low levels of the federal funds rate for an extended period.""

Analysts were expecting the Fed committee to maintain the near-zero interest rate, but they are growing less and less easy with the central bank's ""extended period"" pledge. The Fed has no choice but to raise interest rates once economic stability gains a stronger footing in order to prevent inflation. Analysts contend that in order for the central bank to justly prepare borrowers and investors for the impending increase, officials need to signal early on that a shift from crisis-induced low rates is imminent. That change in the language could come as early as next month when the board meets again in late April.


According to the ""Fed's policy statement"":http://www.federalreserve.gov/newsevents/press/monetary/20100316a.htm issued after the meeting adjourned, at least one board member is siding with the analysts. Kansas City Fed Chief Thomas M. Hoenig, for the second meeting in a row, cast the only dissenting vote. Fed notes show that Hoenig believed ""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.""

Committee members said economic activity has strengthened and the labor market has stabilized since their last meeting in January. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit, the policy statement read. In addition, the board noted that commercial real estate investing is declining, housing starts have stalled, and employers remain reluctant to add to payrolls.

The Fed reiterated its plan to phase out purchases of mortgage-backed securities (MBS) and GSE debt by March 31, 2010. By that time the central bank says it will have bought $1.25 trillion of MBS and $175 billion of agency debt. But policymakers added that they will be closely monitoring this planned exit.

Brian Bethune, chief U.S. financial economist for ""IHS Global Insight"":http://www.ihsglobalinsight.com, said, ""In view of the difficult situation in the housing market…the Fed is keeping its powder dry in the event that mortgage markets are unable to pick up the slack left by the Fed's absence - to wit the [Fed] stated that it ‘will employ its policy tools as necessary to promote economic recovery and stability.'""

The central bank also maintained its plan to close the Term Asset-Backed Securities Loan Facility (TALF) on June 30 for loans backed by new-issue commercial mortgage-backed securities (CMBS).