Federal Reserve policymakers on Wednesday kept the federal funds target rate at zero to 25 basis points.
The Federal Open Market Committee, which sets the rate, anticipates “that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period,” according to a news release from the Fed.
While the economic recovery is continuing, the Fed noted, it has been insufficient in significantly improving the labor market.
Brett Hammond, a managing director and chief investment strategist for TIAA-CREF, said in a telephone interview that he expects the rate to remain on hold for “most of (2011) if not all of it.”
“I think the Fed's interest rate mechanism is one of the few tools left for policymakers at this point,” he said.
He noted that many forces outside the Fed are concerned about inflation and low interest rates putting the economy back into an “asset bubble of some sort.”
There were few big surprises from the announcement, Gregory Whiteley, government portfolio manager at DoubleLine Capital, said in a separate telephone interview. However, he noted that Federal Reserve Chairman Ben Bernanke is looking at the unemployment rate as a measure of economic recovery.
“Until we see some genuine improvement in the labor market, there's not going to be much reason for him to consider changing course,” Mr. Whiteley said in a telephone interview.
Mr. Whiteley said he believes Mr. Bernanke wants to “continue the strategy of getting the yield curve to flatten,” which would likely encourage banks to lend to businesses and spur job creation.
Jim McDonald, senior vice president and chief investment strategist with Northern Trust, said the Fed is “keeping the pedal to the metal in trying to accelerate growth in the U.S. economy.”
He said job growth is what will spur the Fed to start taking its foot off the gas.
“If (the Fed increases employment and produces sustained and steady inflation), their policy will be too easy and they will have to start to tighten,” he said. “They are the only major central bank in the world that is still refilling the punch bowl.”