Long-Term Commitment to Low Rates

Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.

Coming soon after the Congressional effort to lift the debt ceiling, the S&P downgrade of the credit rating of the Federal government, and elevated volatility for stock market prices, the Federal Reserve's Open Market Committee reported a long-term commitment to low interest rates during its August 2011 meeting.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent.

FOMC currently anticipates that economic conditions-including low rates of resource utilization and a subdued outlook for inflation over the medium run-are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

In describing the state of economic conditions, the Fed noted continued labor market weakness and a depressed housing market. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.

For housing, the Fed's explicit commitment to maintain low short-term interest rates through at least mid-2013, coupled with bond market activity in a period with multiple downside risks, set the stage for an overall lower yield curve. This interest rate environment is consistent with a forecast of low mortgage interest rates over the next two years.

Low rates should help support housing demand as it emerges with a healing labor market, provided fiscal and regulatory policies do not prevent large numbers of potential homebuyers from qualifying for mortgages. However, recent low interest rates have not helped lending to small businesses, which is holding back employment growth.

- Courtesy of NAHB