Thursday, March 18, 2010

Federal Reserve Keeping Interest Rates Low?

The central bank continued to sound upbeat about the economy saying the data it reviews suggest that economic activity is continuing to strengthen and that the labor market is starting to stabilize.

The Federal Reserve also said it would end its program of buying mortgage-backed bonds to help keep home loan rates low. That program will conclude at the end of March, 2010 with the Federal Reserve’s mortgage bond holdings at $1.25 trillion.

Even though the market obviously knows that the end of Federal Reserve bond purchases is near, average 30-year mortgage rates have remained around 5% for the last two months.

As for the Federal Reserve’s short-term rate just how long will that extended period of near-zero rates last? The Fed consensus is they will not need to move interest rates up until the September meeting at the earliest based on current data.

Yet for a second straight meeting, one Fed official dissented. Thomas Hoenig, of the Federal Reserve Bank of Kansas City objected to the pledge on low rates. Hoenig believes that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period is no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer term financial stability. My opinion, Mr. Hoenig isn't too far off in his beliefs.

No comments:

Post a Comment