Fed Will Hold Rates at Record Lows

Updated at 3:26 p.m. EASTERN

With the recession apparently over, the Federal Reserve on Wednesday held a key interest rate at a record low and again pledged to keep it there for an "extended period" to foster the fragile economic recovery.

The Fed said economic activity has "continued to pick up" and that the housing market also has grown stronger, a key ingredient to a sustained recovery.

But Fed Chairman Ben Bernanke and his colleagues warned that rising joblessness and hard-to-get-credit for many people and companies could restrain the rebound in the months ahead.

Against that backdrop, the Fed kept the target range for its bank lending rate at zero to 0.25 percent. And it made no major changes to a program to help drive down mortgage rates.

The Fed is spending well over a trillion dollars to buy up mortgage loans from banks. That allows the banks to then loan more and props up the housing market, reports CBS News correspondent Anthony Mason.

"The Federal Reserve has been buying about 80 percent of all mortgage debt that's issued," Bankrate.com's Greg McBride said. "Some months they've been buying 100 percent. Well, that program's set to end at the end of March."

That's critical because at its peak three years ago, nearly $2 trillion was flowing through the credit markets; this year it's estimated to be just $150 billion, Mason reports. If the Fed stops buying mortgages, the cost of borrowing could quickly soar.

Commercial banks' prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will stay at about 3.25 percent, the lowest in decades.

Still, some credit card rates have risen over the last several months. Part of that reflects rate bump-ups by lenders in response to escalating defaults on credit card loans. Lenders also pushed through increases before a new law clamping down on sudden rate hikes for credit card customers takes effect early next year.

The average rate nationwide on a variable-rate credit card is 11.5 percent, according to Bankrate.com. Lenders charge more and credit card customers pay rates higher than the prime because the debt they run up is more risky.

In normal times, the Fed controls only short-term rates. But after the financial crisis erupted the Fed began buying longer-term Treasuries, keeping those rates lower than they'd otherwise be.

This is good news for borrowers with auto loans, some student loans, 15- and 30-year fixed-rate mortgages and some adjustable-rate mortgages. But it hurts savers and people dependent on fixed incomes who would normally be enjoying higher yields.

The Fed stuck with its pledge to keep rates at "exceptionally low" levels for "an extended period." Many economists predict that means the Fed will leave rates where they are into part of next year to help give the recovery traction.

The central bank hopes that low rates will entice American consumers and businesses to boost spending, which would give the recovery more traction.

The Fed has now entered into a new phase - managing the recovery rather than fighting the worst recession and financial crisis to hit the country since the Great Depression.

At some point when the recovery is more firmly rooted, the Fed is likely to start signaling that higher rates are coming. Most analysts don't think the Fed would begin to boost rates until the spring or the summer. One of the clues about eventually rate hikes would be the Fed changing or dropping its pledge to hold rates at super-low levels for an "extended period."

Though it didn't change a program to help drive down mortgage rates, the central bank did say it will trim its purchases of debt from Fannie Mae and Freddie Mac to $175 billion, from $200 billion, because the supply of that debt has declined.

At its previous meeting in late September, the Fed agreed to slow the pace of a $1.25 trillion program to buy mortgage securities from Fannie Mae and Freddie Mac, wrapping up the purchases by the end of March instead of at year-end. So far, the Fed has bought $776 billion of the mortgage securities.

Its efforts to lower mortgage rates are paying off. Rates on 30-year loans averaged 5.03 percent, Freddie Mac reported last week, down from 6.46 percent last year.

Even though the Fed will slow its purchases of mortgage securities, rates for home loans should remain low - in the 5 percent range- as long as the purchases continue, analysts say.

Another key program to drive down a range of interest rates on loans taken out by consumers and small businesses ended in October. The Fed at its August meeting had decided to slow down that effort and wrap up purchases of $300 billion worth of government debt, a month later than previously scheduled.