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Federal Reserve holds interest rates at record lows

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On March 16, the Federal Reserve renewed its pledge to hold interest rates at record lows to boost economic recovery and try to ease the unemployment rate, according to www.msnbc.com.

The Fed also provided a more positive assessment of the economy, including that the job market is stabilizing and business spending on equipment and software has increased significantly. However, it still warned that the high unemployment rate, tight credit and sluggish income growth could dim consumer spending.

The Federal Reserve said it will keep the record-low rates for an "extended period," which is thought to mean at least six months. This inspired hope in investors; the Dow Jones industrial average gained about 30 points.

The Fed made no changes to a program under which it is scheduled to end its mortgage-securities purchases from Fannie Mae and Freddie Mac at the end of this month. Some analysts worry mortgage rates could rise and weaken economic recovery; Stuart Hoffman, chief economist at PNC Financial Services Group, Pittsburgh, believes 30-year fixed mortgages, which currently are about 5 percent, could increase to about 5.25 percent to 5.5 percent when the program ends. The Fed has left open the option of extending the program if the economy weakens.

One dissenter regarding the pledge, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, Kansas City, Mo., says the economy is strong enough for the Fed to signal that rates will soon rise to prevent inflation.

However, the pledge's supporters believe the low rates are necessary to feed the economy. The Fed's target range for its bank lending rate is held at zero to 0.25 percent, and commercial banks' prime lending rate has remained at about 3.25 percent.

Once a more solid economic recovery is evident, the Fed will need to signal higher rates will be coming.


3/19/2010

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