Fedspeak - Why rates are expected to remain low

The FOMC's press release that accompanies a rate decision provides a quick look at what Committee members think about the economy along with where interest rates might be headed. In it's statement last week, the Fed said economic conditions are "likely to warrant exceptionally low levels of the federal funds rate for an extended period." Not a big surprise that it left the language intact.

Comments from Federal Reserve presidents in between meetings give us additional insight into FOMC decisions as well as provide us clues that might signal an impending change in policy.

First, Atlanta Fed chief Dennis Lockhart said in his prepared remarks today that he believes an economic recovery probably got underway this summer. In particular, he pointed out that housing prices appear to have bottomed and risk spreads have normalized. Both are key to self-sustaining recovery.

But he cautioned that his "baseline forecast is for a relatively subdued pace of growth beyond the current quarter and through the medium term. The potential sluggishness of the recovery partly reflects certain unique characteristics of this recession.

It was led by a crisis in banking and capital markets that was triggered by a sharp and persistent reduction in valuations of residential real estate assets."

Lockhart also said problems in commercial real estate are "very worrisome for parts of the banking industry."

San Francisco President Janet Yellin made similar comments today in a speech about the economy and real estate. Yellin reminded her audience that the economy has started to move ahead, but "the strength and durability of the expansion is in question.

Some of the rebound is due to temporary government programs and a swing in inventory investment that will not provide an ongoing source of growth."

Though we are hearing cautious optimism for the Fed, fears that a subdued recovery will not produce the jobs needed to bring down the unemployment rate implies that the fed funds rate will hover near zero for the foreseeable future.