Fed Keeps Benchmark Interest Rate Near Zero

The Federal Reserve board voted Wednesday to keep the target range for its federal funds rate at 0 to 0.25 percent and maintain that level ""for an extended period.""

The central bank has said since December 2008 that economic conditions call for the benchmark rate to be[IMAGE]held ""exceptionally low,"" and its board continues to hold true to that stance despite concerns among some economists and policymakers that if the rate doesn't rise, the near-zero level will give rise to inflation.

At least one board member agrees. Thomas M. Hoenig, head of the Kansas City Federal Reserve Bank, was the only dissenting vote on the interest rate action. Hoenig said 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 a build-up of future imbalances and increase risks to long-term financial stability, while limiting the Fed's flexibility to begin raising rates modestly.

Analysts were looking for any kind of semblance of change in the central bank's wording of its ""monetary policy statement"":http://www.federalreserve.gov/newsevents/press/monetary/20100428a.htm, but it was déjà vu as the Fed remained guarded in its outlook and careful phrasing. One area, though, that did get a bit of a lift was the jobs market.

At its March meeting, the Federal Reserve board said: ""…economic activity has continued to strengthen and…the labor market is stabilizing.""

By Wednesday, that assessment had shifted to: ""…economic activity has continued to strengthen and…the labor market is beginning to improve.""

Fed officials cautioned that the pace of economic recovery is “likely to be moderate for a time,” and noted that while bank lending continues to contract, financial market conditions remain supportive of economic growth. They pointed to the same economic stumbling blocks as posing the biggest risks to improving stability â€" declines in

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commercial real estate investing, modest income growth, lower housing wealth, and employers’ reluctance to add to payrolls.

In emailed commentary regarding the Fed’s policy meeting, ""IHS Global Insight"":http://www.ihsglobalinsight.com pointed out that the central bank’s exit from the mortgage debt markets at the end of March went surprisingly smooth.

“In fact, there was no evidence of any sustained upward pressure on mortgage rate spreads during the transition â€" on the contrary, risk spreads on average continued to edge downwards,” said Brian Bethune, IHS’ chief U.S. financial economist.

The Fed’s statement, though, made no mention of what it plans to do with the $1.25 trillion in assets it added to its balance sheet from purchases of the GSEs’ mortgage-backed securities (MBS) over the past year.

Some Fed officials in recent months have spoken out in favor of selling off the mortgage bonds into the marketplace a little at a time, up to $25 billion each month.

A panel of financial experts from academia called the ""Shadow Financial Regulatory Committee"":http://www.aei.org/raProjectHome?rapId=15 put forth their own proposal for the Fed’s MBS disposition this week. The group says the central bank should consider transferring the securities back to the GSEs.

Given that Fannie Mae and Freddie Mac have been placed in conservatorship and the Treasury has confirmed that their debt is now guaranteed by the U.S. government, the Shadow committee says, “The Treasury could simply issue Treasury debt to Freddie and Fannie with the offsetting accounting transaction being an IOU to the U.S. Treasury. Freddie and Fannie could then swap the acquired Treasury debt for MBS held by the Federal Reserve.”

The group outlined several benefits to this type of transaction. First, it would place housing debt on the books of Freddie and Fannie where it belongs and remove the Fed from financing U.S. housing policy, the members of the Shadow Financial Regulatory Committee said.

“This would also help to re-establish Federal Reserve independence from the Treasury and fiscal policy,” they said in the proposal.

And secondly, “it would free the Fed to device strategies to reduce its balance sheet by engaging in more traditional asset sales in the much deeper Treasury market where the pricing impacts would be smaller and would accommodate a more rapid reduction in excess reserves,” according to the Shadow Financial Regulatory Committee.