Fed keeps lid on short-term rates

The Federal Reserve will keep its target rate for the federal funds overnight rate at zero to 0.25 percent, and continues to expect that economic conditions are likely to warrant "exceptionally low levels of the federal funds rate for an extended period."

The Federal Open Market Committee, in announcing the decision to keep the key short-term rate unchanged, said activity in the housing sector has increased over recent months. While household spending appears to be expanding, it remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.

Businesses are still cutting back on fixed investment and staffing, the committee said, but at a slower pace, and they are making progress in bringing inventory into better alignment with sales.

With "substantial resource slack" likely to continue to keep a lid on prices, and with longer-term inflation expectations stable, the committee expects inflation will "remain subdued for some time."

Some adjustable-rate mortgage (ARM) loans are tied to the federal funds rate, but most are linked to another short-term rate, the London Interbank Offer Rate (LIBOR).

The federal funds rate and LIBOR are both expected to go up if the economy grows too quickly and inflation gets out of hand, which could make it more difficult for ARM borrowers to make their mortgage payments.

Yields on long-term Treasury bonds could also head up, which could put pressure on fixed-rate mortgages, reducing the purchasing power of prospective buyers and diminishing the benefits of refinancing. ...CONTINUED

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