FOMC: Interest Rates to Remain at Current Levels

Feb 28, 2009

March 24, 2009—The Federal Reserve agreed to keep interest rates at their current levels and announced the purchase of debt and long-term Treasury securities. In February, the Consumer Price Index and the Producer Price Index both increased as energy prices come off their lows in late 2008. Also, new residential construction rose 22% in February.

Federal Open Market Committee Monetary Policy
The FOMC kept the federal funds rate at a range between 0% and 0.25% at its latest meeting and is expected to keep it there for some time. The Fed cited the soft labor market, lost housing and equity wealth that is weighing on consumer spending, poor confidence, tight credit, weak investment, and the ongoing global recession in its decision to keep rates at their current levels. However, the biggest news out of the latest Fed statement is the announcement that it will purchase an additional $750 billion in GSE debt to foster lending. Also, the Fed announced the purchase of $300 billion in long-term Treasuries over the next six months. Inflationary fears are no longer on the radar, given weak demand across the board. In fact, the Fed may need to tackle deflation in the future.

Consumer Price Index
The Consumer Price Index (CPI) increased 0.4% in February, coming off a 0.3% in January. A 3.3% increase in energy prices lead the overall increase in the index. The core CPI, which excludes food and energy prices, increased 0.2%. On a year-ago basis, the top-line CPI increased 0.1% while the core CPI is up 1.8%. Inflation appears in check as consumers, businesses, and government have pulled back because of the financial crisis. This report also eases fears of deflation that had been mounting in recent months.

Producer Price Index
Producer prices for finished goods increased 0.1% in February, after rising 0.8% in January. The increase comes as energy prices are rebounding from their lows in late 2008. Prices increased 1.5% in the core crude stage of production, while prices for core intermediate goods fell 0.6%. Furthermore, core finished prices, which exclude food and energy prices, increased 0.2% for the month.

New Residential Construction
Housing starts surged 22.2% in February to 583,000 units, following an upwardly revised decrease of 14.5% in January. Permits for new housing also increased, up 3%. Compared to February 2008, housing starts are down 47.3%. February's report offers some hope that the housing correction may be near an end, especially with the help of the $7,500 homebuyer tax credit included in the stimulus package. However, the weak labor market coupled with continued havoc in the financial markets deters many potential buyers.

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