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Federal Reserve Votes To Keep Interest Rates Steady

By Martin H. Bosworth
ConsumerAffairs.com

February 1, 2007

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The Federal Reserve Board of Governors commemorated their first meeting of 2007 by voting to keep interest rates steady at 5.25 percent.

The Fed vote means that the "prime" lending rate offered by banks and other financiers will remain at 8.25 percent for consumers.

The Fed credited a healthier-than-expected economy for its decision to stay the course.

"Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market," according to the Fed's statement. "Overall, the economy seems likely to expand at a moderate pace over coming quarters."

Bernanke referred to recent reports that the slumping housing market had been seeing improvement, despite record-high numbers of homes facing foreclosure due to failure to keep up with ballooning loan payments.

Two million homeowners, mostly in the "subprime" or below-average market, may be in danger of default on their loans as their rates reset.

The subprime market is faltering so badly that J.P. Morgan Chase CEO Jamie Dimon said at a recent conference that "home equity is subject to deterioration from a recession." Chase has divested itself of much of its subprime portfolio as the market tanks and lenders shutter their doors.

Nevertheless, consumer spending and applications for new homes showed unexpected strength in the last quarter of 2006, leading the Fed board to caution that price and wage inflation were still a concern, and may lead to interest rate hikes down the line.

The board voted 11-0 to extend the interest rate at the Jan. 31st meeting. Fed governor Jeffrey Lacker, who had repeatedly dissented in favor of an increase, is not a voting member of the board during the 2007 session.

Lacker, president of the Richmond Federal Reserve bank, recently reiterated a warning that inflation pressures from higher prices and wages "clearly remains the predominant macroeconomic policy risk."

Another Fed governor, Frederic Mishkin, recently counseled against any sort of intervention in "asset bubbles," such as those caused by the recent skyrocket in home prices. He said it was more important for the government to provide aid if and when a bubble bursts.

"The serious mistake for a central bank that is confronting a bubble is not failing to stop it but rather failing to respond rapidly enough after it has burst," Mishkin said.

Bernanke Wins Praise

The heaviest scrutiny remains on current Fed chair Ben Bernanke, who succeeded Alan Greenspan just as the housing bubble began to burst, after years of astronomical price gains.

Greenspan was blamed for cutting interest rates sharply and encouraging policies to extend credit to anyone, regardless of income or financial history.

This contributed to many homeowners using "creative mortgages" to purchase homes they could not otherwise afford, often for the purpose of "flipping" them for quick profit.

Bernanke was generally feted by Wall Street for guiding the markets, and stocks responded positively in the wake of the Fed's announcement, with some saying that Bernanke's guidance will keep interest rates steady throughout 2007.

Higher interest rates would mean even tougher circumstances for cash-strapped consumers floating credit card debt and mortgage loans.

Bernanke's aim is to ensure a "soft landing" for the economy, wherein the housing bubble deflates without tipping the overall economy into recession, but changes in interest rates to contain inflation might have the opposite effect.

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