Federal Reserve holds rates for 9th time

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The Federal Reserve doesn’t want to surprise anyone at this stage of the economic cycle. So it didn’t.

The central bank’s rate-setting Federal Open Market Committee kept its target for the federal funds rate near zero percent, as expected. The federal funds rate is what banks charge one another for overnight loans. The Fed will keep it in a range between zero percent and 0.25 percent. The prime rate will remain 3.25 percent. Loans based on the prime rate — home equity lines of credit and some fixed-rate credit cards and auto loans — will sport unchanged interest rates.

It has been a year since the central bank cut the federal funds rate to a range between zero percent and 0.25 percent. The Fed plans to keep it that way for a while.

“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” the committee said in its monetary statement.

The federal funds rate couldn’t be any lower. It’s at rock-bottom because the Fed wants to encourage lending, which would fuel economic growth and increase employment. The flip side of low interest rates is that they are believed to fuel inflation. The central bank’s critics worry that the Fed won’t raise short-term interest rates quickly enough to ward off high inflation. Fed officials say they are vigilant about inflation.

In this latest monetary policy statement, the Fed panel devoted a long paragraph to enumerating the various ways that it has poured money into the world financial system to keep money circulating. These financial tools will have to be withdrawn someday, and the Fed reiterated the previously announced timetables for those withdrawals. There was nothing new in the announcement. It served as a reminder that the Fed intends to stick to its schedule. Again, the goal seems to be: no surprises.

Among other things, the Fed still intends to stop buying up to $1.25 trillion in mortgage-backed securities by the end of March.

There is an aphorism in economic forecasting that goes: “One month of data does not make a trend.” That’s especially true when related data conflict with each other. Take the November inflation reports, which came out this week. The core Producer Price Index, which tracks wholesale prices, rose 0.5 percent in November. That’s a substantial jump in wholesale prices, but it would be more worrisome if it were the third or fourth such increase in a row, which it wasn’t. Anyway, “the pathway from wholesale costs to retail prices is not direct, so let’s not get too worried about inflation yet,” said Joel Naroff, president of Naroff Economic Advisors.

His tranquil reaction seemed to be confirmed the next day, with the results of the Consumer Price Index, which tracks retail prices. The core CPI was unchanged in November. The core CPI excludes food and fuel, whose prices tend to move up and down quickly. When you include food and fuel, CPI was up 0.4 percent in November.

Fed Chairman Ben Bernanke has been candid about his assessment of the economy, and about his plans for eventually tightening monetary policy. In a speech last week to the Economic Club of Washington, D.C., he gave an extended preview of today’s monetary policy statement. About inflation, he said: “Although we will continue to monitor inflation closely, on net it appears likely to remain subdued for some time.” That seemed to be an indication that the Fed would continue to keep the federal funds rate low well into the future.

Bernanke added that the Fed has other tools besides raising the federal funds rate.

Among them: The Fed can pay a slightly higher interest rate on bank reserves it holds, and it can sell mortgage-backed securities and Treasuries on the open market. Both actions would pull cash out of the financial system, putting downward pressure on prices.