Federal Reserve Appears Unlikely to Raise Interest Rates, Mortgage Rates to Stay Low

On Tuesday and Wednesday of this week the Federal Reserve’s interest rate policy committee, the Federal Open Market Committee meets for the first time since early May.  The Fed’s responses to developments since that time should be fairly interesting.

The FOMC’s last statement could probably be characterized as cautiously optimistic:

“Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability”.

After the last meeting the Federal Reserve retained it pledge to keep rates low “for an extended period”. In the interim period, a variety of FOMC members have chimed in on the future of interest rates, with no clear consensus emerging.  It appears most members do not believe it is yet appropriate to raise rates.  FOMC monetary policy helps to dictate mortgage rates and the interest rates on a variety of other financial instruments.

Since the last FOMC meeting we have seen a lot of disappointing data that seems to point toward a general slowdown of the economy. Unemployment remains high as the labor market remains weak.  Retail spending is down, and home sales have collapsed in the wake of the expired first time home buyer tax credit.  This is also the first meeting since the European Union announced a huge bailout of several Euro countries that are struggling with massive debt loads.  The bailout will hopefully prop up these countries and protect their creditors against massive losses.

Inflation is currently running around 1.5 percent, which falls below the Fed’s target rate of 2 percent.  There are concerns that further declines could cause a deflationary spiral.  At this time it seems unlikely to me that the Fed will choose to tighten monetary policy lest it kill any momentum that the economic recovery currently has.

Do you think the Fed will raise rates at its meeting?  Let us know in the comments section below.