Fed Remains in Hibernation on Interest Rates

After 17 consecutive meetings of raising interest rates, and a switch over to new leadership under Ben Bernanke, the Federal Reserve went into hibernation last August and has remained there ever since. On Wednesday the watchdog of federal monetary policy did what many economists expected it to do and hit the snooze button yet again, deciding to keep the short term federal funds rate at its current level of 5.25 percent.

The recent actions of the Federal Open Market Committee may seem unresponsive to concerns of industries, like real estate, that believe lowering interest rates will help the industry pull itself up by its bootstraps and reverse the current downward trend.

Still, the committee does in fact have one eye open at all times, particularly watching core inflation and economic growth. And apparently committee members are not happy with what they are seeing.

“Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing,” the Committee said in a statement released Wednesday. “Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.”

Much of the rhetoric in this most recent FOMC statement is similar to previous statements released since the Fed stopped adjusting rates last year. However, the statement does raise the question, for the first time, of what would happen if inflation does not moderate over time as expected.

At this time the FOMC has no answer to the question. Instead, the agency is leaving it an open-ended question awaiting future information before making further policy decisions.

For real estate professionals, investors and potential home buyers logging onto RealtyTrac, the decision to keep rates at the status quo means that foreclosures should maintain their upward trend for the foreseeable future. With rates remaining at current levels, expect subprime loans to continue their upward adjustments, and many local real estate markets to continue to suffer as prices and sales remain depressed.