Fed Keeps Interest Rates Near Zero

NEW YORK (TheStreet) -- The Federal Reserve on Wednesday said it would keep its key interest rate target at near zero, signaling that one of the first tools it used to battle the financial crisis is likely to be the last it returns to its toolkit.

The central bank's Federal Open Markets Committee unanimously maintained its target rate at a range between zero and 0.25%, where it has stood since December. The futures market, stock market, credit market and economy are all betting that interest rates will stay low for the foreseeable future. In any statements about plans to mend the economic crisis, federal officials -- including Fed Chairman Ben Bernanke -- have explicitly said the same.

The question for today was not whether the Fed would hike rates, but when. The Fed's terminology on Wednesday again indicated a lengthy duration for its loose monetary policy, using phrases like, "a time," "some time" and "an extended period."

"Hiking rates is a very big impact with a blunt instrument; it's not a scalpel, it's a hatchet," says Dennis Nason, a former senior banker at Credit Suisse, Citigroup and Wells Fargo. "They don't want to be accused of being another former Fed Chairman Alan Greenspan, keeping interest rates too low for too long, with too much liquidity and people spending foolishly because of that liquidity."

There are indications that all the money pumping through the system has been sufficiently effective. The stock market has soared from the lows of March, and is up more than 10% year-to-date as the credit markets have begun to unfreeze. Traders are even getting back in the saddle with complex investment vehicles that were deemed untouchably toxic not that long ago.

As a result, the Fed has begun to unwind liquidity programs directed at the credit markets with narrower goals, like the Commercial Paper Funding Facility. On Wednesday, the Fed added some more color to its plans for these programs, saying that until economic slack has lessened, the central bank would "employ a wide range of tools to promote economic recovery and to preserve price stability."

Its plan to purchase $1.25 trillion of mortgage-backed securities from Fannie Mae and Freddie Mac and up to $200 billion worth of agency debt, will end in the first quarter. The Fed's plans to buy $300 billion of Treasury securities will be complete next month.

Doug Roberts, chief investment strategist for ChannelCapitalResearch.com, believes the Fed may also engineer reverse purchase agreements to drain money from the system before it begins to hike rates.