On a day when new single-family home sales plummeted a record 32.7% in May, Federal Reserve officials are expected Wednesday afternoon, June 23, to announce no change in the nation’s benchmark interest rate.
The Federal Open Market Committee is scheduled to issue a statement accompanying its decision on the benchmark federal funds rates at 2:15 p.m EDT. The FOMC on April 28 maintained the target range for the fed funds rate at 0% to 0.25%. The Fed has kept interest rates at historic lows near zero since December 2008.
To be sure, the new home sales data for May issued by the Commerce Department bolsters the Fed’s argument for keeping rates low in order to encourage activity in the mortgage market.
With the fading of the popular $8,000 first-time homebuyer’s federal tax credit, sales of new single-family homes hit their lowest level since record keeping started in 1963, to a 300,000-unit annual rate in May from a downwardly revised 446,000 units in April.
Economists’ consensus is for no chance of a change in the Fed’s policy of keeping rates low for an “extended period” as the nation’s economic recovery crawls along at a snail’s pace.
When the FOMC meets, members will be confronted with the risk of a weaker economy coming up against the limits of monetary policy when interest rates are already zero, according to Steve Blitz, senior economist with New York-based Majestic Research.
“The banking system has already been stuffed with cash but it is sitting in reserves at the Fed, essentially liquidity against legacy assets consisting of too many bad loans and broken securities,” Blitz writes in an analyst note. “The cash isn’t there to lend out–banks haven’t even taken down as many Treasury securities relative to total bank credit as they normally do at this point in the cycle.”
Non-financial corporations are also sitting on a mountain of cash, Blitz added, but they are also sitting on a mountain of long-term debt raised to put cash in the coffers and lower the volume of short-term obligations. Neither banks nor non-financial companies are positioned to do anything more with their money than keep it invested in short-term earnings with virtually no return, he said.
“And net worth is well below the pre-recession peak,” Blitz said. “At some point, the cash will go into hopefully productive capital investments, but the opportunities aren’t there yet.”
The economy is in recovery and isn’t about to grow any faster, Blitz writes.
“Ebbing momentum will not reduce long-term unemployment, satisfy policymakers, or justify the forward prices embedded in the capital markets that expect a normal recovery to take hold and modest inflation to return,” he says.
Read a story about the Fed’s most recent rate action from the archives of InvestmentAdvisor.com.