The Federal Reserve decided Tuesday to keep its benchmark interest rate near zero, reinforcing a commitment that rates should stay at record lows as the nation grapples with high unemployment and tight credit.
Concluding a one-day policy meeting, the Federal Open Market Committee said the target rate for overnight loans between banks would remain in the zero-to-0.25 percent range "for an extended period."
"Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit," the Fed said in a statement.
Although it didn't raise rates or signal that higher rates are coming, the Fed's assessment of the economy was more upbeat than in its January statement. Committee members said the labor market is stabilizing, business spending has risen significantly and inflation is likely to remain subdued for some time.
Rates have hovered at record lows since December 2008 as the U.S. struggles to recover from the most severe downturn since the Great Depression.
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, opposed the decision for the second meeting in a row. Keeping rates near zero, he warned, "could lead to a buildup of financial imbalances."
Hoenig's dissent illustrates the Fed's challenge in deciding when to signal that higher rates are coming.
The Fed also confirmed plans to phase out some of the programs put in place to pump liquidity into the banking system. By the end of the month, it will stop buying mortgage-backed securities. But it left the door open to reactivating the programs if the economy deteriorates.
Job Growth Outlook Remains Weak
Meanwhile, the Obama administration said Tuesday that while companies are expected to add about 100,000 jobs a month for the remainder of the year, it's not enough to change the unemployment rate.
Testifying before the House Appropriations Committee, Treasury Secretary Timothy Geithner, White House Budget Director Peter Orszag and top economic adviser Christina Romer said February's 9.7 percent unemployment rate isn't likely to improve until 2011 and 2012.
The United States has weathered the worst of the economic decline, they said, but unemployment remains a challenge. The national joblessness rate held at 9.7 percent last month.
"Although the rate of job loss has slowed dramatically, job gain has not yet begun, and the administration will not be satisfied until the many Americans seeking work can find it," Geithner, Romer and Orszag told lawmakers in a joint statement Tuesday.
The trio warned that the jobless rate might even rise in the coming months. They said they don't foresee job growth until the fourth quarter of 2011, when unemployment is expected to hit 8.9 percent. The jobless rate could fall to 7.9 percent by the end of 2012, they predicted.
Home Construction Falls
The Fed's decision came hours after the Commerce Department released a report on home construction, which was a huge factor in the economic downturn.
Construction of new homes fell 5.9 percent to a seasonally adjusted annual rate of 575,000 units in February, slightly higher than the 570,000 that economists were expecting.
Activity dropped by 9.6 percent in the Northeast and 15.5 percent in the South — both regions hit hard by snowstorms. Construction rose by 10.6 percent in the Midwest and 7.9 percent in the West.
Building permits, considered a good barometer of future activity, fell 1.6 percent to an annual rate of 612,000 units after a 4.7 percent drop in January.
Some economists blamed the drop in housing starts on the snowstorms that paralyzed much of the country during February, but others said the glut of foreclosures on the market hampered demand.
David Crowe, chief economist at the National Association of Home Builders, said the inventory of new homes is at its lowest level since 1971.
"The builders are still competing against a lot of distressed sales, foreclosures and short sales and so forth," Crowe said. He added that builders are likely to remain cautious until more troubled properties work their way through the system.
From NPR's Deborah Tedford, Jim Zarroli and Tamara Keith, with additional material from The Associated Press
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