The Federal Reserve on Tuesday repeated its pledge to hold interest rates at record lows to foster the economic recovery and ease high unemployment.
But the Fed's assessment of the economy at its meeting Tuesday was a bit more upbeat. It said the job market is stabilizing. That was an improvement from its January statement, when it said the deterioration in the labor market 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. "It's been painted black for so long. Now, it is a lighter shade of gray."
The Fed held its target range for its bank lending rate at zero to 0.25 percent, where it's been since December 2008. In response, commercial banks' prime lending rate, used to peg rates on certain credit cards and consumer loans, has remained about 3.25 percent — its lowest in decades.
Super-low rates benefit borrowers who qualify for loans and are willing to take on more debt. But they hurt savers. Low rates are especially hard on people living on fixed incomes who are earning scant returns on their savings.
The Fed's pledge to keep record-low rates for an "extended period" relieved investors. The Dow Jones industrial average finished the day up nearly 44 points. Before the announcement, it had posted a gain in the single digits.
Prices for Treasurys rose slightly. The yield on the benchmark 10-year Treasury fell to 3.66 percent from 3.68 percent just before the announcement.
The Fed made no changes to a program to drive down mortgage rates and bolster the housing market, even as a government report Tuesday showed housing construction tumbling in February.
Under that program, the Fed is scheduled to end purchases of $1.25 trillion worth of mortgage-securities from Fannie Mae and Freddie Mac at the end of this month. Some analysts fear that once the program ends, mortgage rates could rise. That could weaken the recovery in housing and the overall economy. The Fed has left the door open to extending the program if the economy weakens.
"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," said Brian Bethune, an economist at IHS Global Insight.
Hoffman thinks 30-year fixed mortgage rates, hovering around 5 percent, could rise to around 5.25 percent to 5.5 percent after the Fed program ends. That increase also would reflect stronger demand for mortgages as people rush to take advantage of a homebuyer tax credit that expires at the end of April.
The average rate on 30-year fixed mortgages dipped to 4.95 percent last week, from 4.97 percent a week earlier, according to mortgage finance company Freddie Mac.
The Fed's decision to keep record-low rates for an "extended period" — thought to mean six more months — again drew one dissent. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, for a second straight meeting opposed keeping the pledge.
This time, he expressed concern that low rates could cause a buildup of "financial imbalances" and put the economy's stability at risk. Some analysts took that to mean Hoenig worries that holding rates too low for too long could feed some new speculative bubble in assets such as stocks or commodities.
Hoenig's dissent illustrates the Fed's challenge in deciding when to signal that higher rates are coming. Hoenig thinks the economy is strong enough for the Fed to telegraph that rates will rise soon to prevent inflation or asset bubbles. But Fed Chairman Ben Bernanke and other colleagues think the low rates will continue to be needed to feed the economic recovery.
The Fed said the pace of the recovery will likely remain moderate. That means inflation is expected to stay in check, giving the Fed leeway to maintain record-low rates without triggering higher prices. The Fed wants to see job growth and lower unemployment before it considers a rate increase, analysts said.
The recession wiped out 8.4 million jobs. With companies still wary of ramping up hiring, the unemployment rate — now at 9.7 percent — is likely to stay high. Even though the jobless rate hasn't budged for two months and companies aren't cutting as many jobs as they did a year ago, hiring is tepid.
"The Fed is holding out for clearer signs of improvements in the labor market," said Anthony Chan, chief economist at JP Morgan's Private Wealth Management. "Until then, the Fed feels it needs the insurance policy of keeping rates low."
Once the recovery is more entrenched, the Fed will need to signal that higher rates will be coming.
To do that, the Fed could drop its commitment to keep rates at record lows for an "extended period." Or it could pledge to keep rates low only for "some time" or vow to keep "policy accommodative." Or it could change its language in some other way to stress that credit will be tightened when the time is right.
Any such step would signal that the days of easy money are fading.
Hoenig has been pushing to change the signal. At the Fed's last meeting in late January, Hoenig favored saying rates would stay low for "some time." He thought that would give the Fed more flexibility to start raising rates.
Hoffman and some other analysts say they don't think the Fed will signal a change toward higher rates until early summer, with a rate increase to follow in the fall. Chan thinks the Fed won't boost rates until next year.
David Wyss, chief economist at Standard & Poor's in New York, said the Fed will need to see the jobs crisis ease before it increases rates.
"The earliest that they will raise rates will be six months from now, and they could hold off for another year," Wyss said.
Complete text of the Fed statement follows:
Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent 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. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed 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 the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.