The Federal Reserve today announced it will keep the federal funds target rate at zero to 0.25% and expects the rate to stay at exceptionally low levels for an extended period, according to a statement by the Federal Open Market Committee, which sets the rate.
Economic activity is leveling out, financial markets have improved in recent weeks and household spending — although constrained by job losses, sluggish income growth, lower housing wealth and tight credit — is showing signs of stabilizing, according to the FOMC statement.
The Federal Reserve also announced it will slow the pace of its plan to purchase Treasury securities, anticipating the transactions will be completed by the end of October. The purchases will include a total of up to $1.25 trillion of agency mortgage-backed securities, up to $200 billion of agency debt and $300 billion of Treasury securities.
Robert Tipp, chief investment strategist for Prudential Fixed Income Management, said the plan to taper off the purchases aims to minimize the impact of ending the program.
“But we see that the mortgage program is going to continue to the end of the year and be supportive of the mortgage market, which is certainly very important given the tumult going on in the residential real estate sector,” he said in an interview.
“They (committee members) clearly have a fine line to walk here. On one hand, they need to peel back some of the supercharged measures and acknowledge the economy is bottoming, but at the same time they have to signal that they see the economy is still extremely weak and will, therefore, require an extremely low fed funds rate for an extended period of time.”
Dan Dektar, CIO at Smith Breeden Associates, said in an e-mail that the unchanged Fed funds rate was expected.
“They acknowledged less dire economic circumstances but cited concerns about poor income growth and business spending. They also confirmed what the market had expected — that they would soon be ending their Treasury security purchase program.