Fed maintains support for low interest rates
By Fred O. Williams | Published: September 18, 2013
The U.S. Federal Reserve decided to maintain its current support for low long-term interest rates, defying expectations that it would take a step away from easy-money policies for the first time since mid-2006.
The Fed's rate-setting committee voted to continue pumping money into bonds at the current level of $85 billion a month. Most analysts had predicted the amount would be shaved by $10 billion to $20 billion. The bond purchases are designed to keep mortgage interest rates low by supplying cash for mortgage-backed securities and Treasury bonds.
As expected, the Federal Open Market Committee also left short-term rates that govern credit card APRs unchanged. To boost a still-recovering economy, the committee voted to leave the federal funds rate target between 0 percent and 0.25 percent. The federal funds rate is the benchmark used by banks in setting their prime rates, which in turn set most credit card rates.
The Federal Open Market Committee announcement from the conclusion of its Sept. 17-18 meeting said bond purchases would be maintained at the current level to await more evidence of improvement in the underlying strength of the economy.
"Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated," the statement said.The announcement also cited recent increases in mortgage rates and said "fiscal policy is restraining economic growth," in a reference to federal across-the-board spending cuts known as the sequester.
In its forecast of economic conditions, FOMC members took a more pessimistic view of overall growth, predicting that GDP will rise 2.0 percent to 2.3 percent this year, about 0.3 percentage points below their expectations at the last meeting in June.
The Fed reiterated previous guidance that it will hold the line on short-term rates until unemployment drops to about 6.5 percent. The most recent jobless rate was 7.3 percent in August. During a press conference discussing the decision, Fed Chairman Benjamin Bernanke said that the figure is only a threshold, not a trigger.
"The first increases in short-term rates might not occur until the unemployment rate is considerably below 6.5 percent," he said.
The first increases in short-term rates might not occur until the unemployment rate is considerably below 6.5 percent.
|-- Ben Bernanke
Chairman, Federal Reserve
As the federal government approaches a showdown on its budget and debt ceiling, Bernanke indirectly criticised restrictive federal spending policies. Asked if the bond purchases are effective, given the continued weakness in the job market, Bernanke said that there have been improvements in jobs, and they have come in the face of federal spending cuts projected to cost hundreds of thousands of jobs. "There are a lot of things that monetary policy can't address," he said. "We do what we can do, and if we get help we're delighted to have help, from other policymakers and the private sector."
Short-term rates can't stay at historic lows forever. But there are plenty of signs that they could last quite a while longer.
For one thing, inflation has been tame, giving policymakers leeway for more monetary stimulus. The Department of Labor's August 2013 inflation reading extended the trend, with prices rising at an annual rate of 1.5 percent for August, below the Fed's target of 2 percent. It might sound odd to have a target for price increases, but ultra-low inflation is interpreted as a sign of excess slack in the economy.
And former Treasury Secretary Lawrence Summers has bowed out of consideration for the Fed chairman's job when Benjamin Bernanke's current term ends in January 2014. Fed watchers said Summers was likely to support higher rates, leaving the remaining candidates more likely to keep rates lower, longer. Summers' exit leaves Vice Chairwoman Janet Yellen the favorite for the top job, which is filled by presidential appointment.
Some economists "are considerably more willing to err on the side of sustaining a lower unemployment rate -- they'll give up a little potential inflation," said Gregory Miller, chief economist at SunTrust Bank. "There are folks on the other extreme who get out of bed in the morning waging war on inflation."
Miller is one who thinks that the glide path to rate increases could be shorter than the expected two-plus years. Unemployment will fall to 6.5 percent by mid-2014 at its current pace of improvement, he said. That's about a year ahead of the FOMC members' majority view of when the federal funds rate should start to rise.
However, recent jobless numbers have been weak, kindling speculation that the Fed could hold off further on boosting rates. Some of the recent improvement in the unemployment rate comes from people leaving the work force, as opposed to gains in job creation. Some economists -- Miller among them -- say that the shrinking labor force is part of a long-term trend in how families choose to live. But others believe that at least some of the departures are caused by discouraged workers giving up on the job market -- and that calls for more stimulus, they argue.
Credit card APRs are linked to the prime rate, which is 3 percentage points higher than the federal funds rate. What's the outlook for credit card APRs? Of 17 FOMC members and alternates, all support leaving the federal funds rate at the current near-zero level through the end of the year, and 14 support continuing the policy through next year. In 2015, 14 members support a federal funds rate of 1 percent, and three support higher rates.
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