mortgage

Federal Reserve holds rates for 11th time

Interest rates on home equity lines of credit and variable-rate credit cards will remain the same, as the Federal Reserve kept its benchmark short-term rate unchanged.

The Federal Open Market Committee maintained its target for the federal funds rate in a range of zero percent to 0.25 percent, as everyone had expected. Banks make overnight loans to one another at the federal funds rate, which then influences other short-term rates, including variable-rate credit cards, HELOCs and shorter certificates of deposit. The Fed has kept the federal funds rate near zero since December 2008 to encourage consumers and businesses to borrow and spend to get the economy going.

In its statement issued after this meeting, the Fed was slightly more upbeat than after its last meeting, at the end of January. This time, the rate-setting panel said "the labor market is stabilizing." In January, it said, "the deterioration in the labor market is abating." In the Fed's world, where these statements are buffed and polished, the change in wording means that the central bank has confidence that the economy is showing signs of improvement.

Eventually the economy will recover and the Fed will raise the federal funds rate. At some point, the Fed will hint that rate increases are in view. That hint is likely to come via a change in wording. For months, the Fed has been saying that it will keep the federal funds rate near zero "for an extended period." When Wall Street reads "extended period," it translates that to mean "for at least five or six more months."

At its Jan. 26-27 meeting, one member of the rate-setting committee dissented from the Fed's statement. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, said the "extended period" wording "was no longer warranted." He wanted to hint that higher rates would be coming in the second half of this year.

Hoenig dissented again at this meeting. Bystanders had been waiting to see if anyone would join him. No one did.

"The dissents are not good," says Kenneth Thomas, a Fed scholar and a lecturer in finance at the Wharton School of the University of Pennsylvania. He adds that dissent is OK in the sense that it reflects majority rule and healthy debate. But "too much in the way of dissent could begin to create more uncertainty than we need," he says. "Then people start to wonder, well, I had a pretty good idea where rates were going to be for the next six months or the rest of the year, but now I'm confused. And that's not good."

The federal funds rate matters because the prime rate is based on it. Right now the prime rate is 3.25 percent, and a few consumer rates -- mainly credit cards and HELOCs -- are pegged to the prime rate. When the federal funds rate eventually rises this year or next, the prime rate will go up on the same day, and rates on credit cards and HELOCs will follow.

Longer-term rates, for mortgages and auto loans and such, operate independently from the federal funds rate. Instead, they respond to securities markets. Right now, the Fed dominates the market for mortgage-backed securities, and the central bank's explicit goal is to keep rates low. But the Fed reiterated that it plans to withdraw from the mortgage market by the end of March. If mortgage rates rise, it will be because of the Fed's withdrawal, and it won't have anything to do with the federal funds rate.

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