Interest rates fall after the Federal Reserve keeps key lending rate at historic lows

Interest rates fall after Fed stands pat

CHARLOTTE, N.C. — Interest rates fell in the bond market Tuesday after the Federal Reserve said it is still likely to keep a key lending rate at historic lows for an “extended period.”

The yield on the 10-year Treasury note maturing in February 2020 fell to 3.66 percent in late Tuesday trading from 3.70 percent late Monday. Its price rose 12/32 at 99 24/32. The yield of the 10-year note is linked to interest rates on mortgages and other consumer loans.

The Fed included in its statement a line that it has used before: that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

With the Fed’s latest decision, questions remain about the pace of an economic rebound. Inflation could become a problem if the central bank holds its interest rate target at essentially zero for too long.

As the economy improves, the Fed will need to start increasing rates to fend off inflation, which could hurt Treasurys. “This statement seems to suggest that’s still a few months away,” said Nick Kalivas, vice president of financial research at MF Global in Chicago.

The Fed made its prediction as it also described an economy that was showing slight improvements, but not enough change to adjust its rate policy.

The Fed said businesses were spending more, but at the same time the housing and labor markets remain weak.

Stocks held on to modest gains with the Dow Jones industrial average rising more than 43 points. Broader indexes also advanced.

In other trading, the yield on 30-year bond that matures in February 2040 fell to 4.59 percent from 4.63 percent. Its price rose 21/32 to 100 18/32.

The yield on the two-year note that matures in February 2012 fell to 0.92 percent from 0.95 percent. Its price rose 2/32 to 99 29/32.

The yield on the three-month T-bill that matures June 17 was unchanged from 0.15 percent. Its discount rate was 0.16 percent.