Deterioration in job markets is abating and economic activity has picked up but is likely to remain weak for a time, the Federal Reserve said in leaving its target for a key short-term interest rate at zero to 0.25 percent.

The housing sector "has shown some signs of improvement over recent months," and household spending "appears to be expanding at a moderate rate," the Federal Reserve Open Market Committee said in announcing its decision to leave the federal funds overnight rate unchanged.

While the Fed is expected to start raising short-term interest rates if signs of inflation emerge, the economy remains constrained by a "weak labor market, modest income growth, lower housing wealth, and tight credit," the committee said.

The Fed said it remains committed to continuing through March a program credited with keeping rates on mortgages low. The Fed is purchasing $1.25 trillion of mortgage-backed securities backed by Fannie Mae, Freddie Mac and Ginnie Mae, and $175 billion of Fannie and Freddie debt.

In a forecast published Dec. 8, the Mortgage Bankers Association projected rates on 30-year fixed-rate mortgages will rise for the next eight consecutive quarters, from an average of 4.9 percent during the final quarter of 2009 to 6.2 percent by the fourth quarter of 2011.

The group forecast that the 30-year fixed-rate mortgage will average 5.5 percent in 2010 and 6 percent in 2011, up from 5 percent in 2009.

The Mortgage Bankers Association said today that the average contract interest rate for 30-year fixed-rate mortgages for the week ending Dec. 11 increased to 4.92 percent from 4.88 percent, with points decreasing to 1.08 from 1.17 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

A separate survey by Freddie Mac showed the 30-year fixed-rate mortgage hitting a record low of 4.71 percent during the first week of December in records dating back to 1971.


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