Federal Reserve holds rates for 10th time

Highlights

* The Federal Open Market Committee maintained its target for the federal funds rate.
* The yields on insured bank deposits are likely to remain stuck in the muck.
* The Fed has bought more than a trillion dollars' worth of mortgage-backed securities since late 2008.

The Federal Reserve continues to punish savers and reward borrowers as it keeps its benchmark overnight interest rate at about zero percent.

The Federal Open Market Committee maintained its target for the federal funds rate in a range of zero percent to 0.25 percent, in a decision that everyone expected, and hinted that it won't raise the rate anytime soon. Banks make overnight loans to one another at the federal funds rate, which then influences other short-term rates, including variable-rate credit cards and shorter-term certificates of deposit. The Fed has kept the federal funds rate near zero for more than 13 months to encourage consumers and businesses to borrow and spend to get the economy going.

For months, the Fed has said that economic conditions "are likely to warrant exceptionally low levels of the federal funds rate for an extended period." That's the Fed's way of saying that it plans to keep the rate near zero for at least the next few months. The Fed kept that wording in this monetary policy statement. But, in a change, the decision to keep that wording wasn't unanimous. One member of the panel, Thomas Hoenig, "believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted," according to the Fed's statement.

"The first crack in the armor," says Bob Walters, chief economist for Quicken Loans. But he adds that he doesn't think a lone dissenter is a big deal -- if two or three committee members dissented, they would be sending a clear message.

With the federal funds rate so low, the yields on insured bank deposits are likely to remain stuck in the muck. Last week, the average yield on a money market account was 0.24 percent in Bankrate's weekly survey. CDs weren't much better, with yields less than half a percent for deposits of six months or less. Those yields probably won't improve anytime soon.

It's too early to say how the Fed's rate decision will affect mortgages. Fixed-rate mortgages are long-term loans, so the overnight rate has little impact on them. In typical times, mortgage rates reflect investors' consensus about the economy: In good times, mortgage rates tend to rise, and in recessions, mortgage rates tend to fall. But these aren't typical times.

In an effort to reduce mortgage rates, the Fed has bought more than a trillion dollars' worth of mortgage-backed securities since late 2008. In announcing the purchase program in November 2008, the Fed said that the goals were to "reduce the cost and increase the availability of credit for the purchase of houses."

There's no doubt that the Fed succeeded in its first goal, that of reducing mortgage rates. In October 2008, the month before the Fed announced its plan to buy mortgage-backed securities, the 30-year fixed-rate mortgage averaged 6.49 percent. In December 2009, the 30-year fixed-rate mortgage averaged 5.15 percent.

The Fed reiterated that it plans to stop buying mortgage-backed securities by the end of March. Almost everyone in the mortgage industry expects the Fed's withdrawal from the market to be followed quickly by a rise in mortgage rates. But mortgage analyst Adam Quinones thinks the increase in mortgage rates might be muted, because of lack of demand. "There isn't a better time for the Fed to make an exit," Quinones says.

Walters thinks rates might rise after the Fed withdraws from the mortgage market, but he doesn't expect them to skyrocket. "Wouldn't it have happened already?" he asks. After all, the Fed has been broadcasting the withdrawal plan for months. No one will be taken by surprise when the Fed stops buying mortgage-backed securities. The last thing the Fed wants to do is spring any surprises on investors.