Federal Reserve Won’t Change Interest Rates
(WASHINGTON) -- The Federal Reserve announced Wednesday that it won't be changing its $85 billion a month bond purchasing stimulus program, though labor market conditions have improved in recent months. It will keep its target interest near zero while unemployment remains above 6.5 percent.
The Fed, which has been injected trillions of dollars into the slowly recovering American economy, made an announcement on its intentions in three parts on Wednesday. This is the Fed's most closely watched announcement since a third round of its bond purchasing program, or "quantitative easing" in September last year.
Federal Reserve Chairman Ben Bernanke said the Federal Reserve may end its bond purchases in mid-2014 if its economic forecasts are correct.
The Federal Reserve said in its statement Wednesday that economic activity has been "expanding at a moderate pace" since its monetary policy-making group, the Federal Open Market Committee, met in May.
Stock investors are worried that an end to the stimulus program will mean a swoon in equity prices. Bond investors fear that higher interest rates will depress the value of their holdings. When interest rates go up, the value of bonds declines.
The agency lowered its unemployment forecasts for this year to 7.25 percent, slightly better than its previous projection of up to 7.5 percent. Its forecast for the unemployment rate next year is 6.65 percent.
The Labor Department reported earlier this month that the unemployment rate for May rose to 7.6 percent with the addition of 175,000 jobs.
After its two-day meeting, the committee decided to keep the target rate for the federal funds rate at zero to 1/4 percent. Between the next year or two years, inflation is projected to be more than a half percentage point above the committee's two percent long-term goal, the Fed said.
Bernanke held a press conference expanding upon the Federal Reserve's statement and economic outlook. But he didn't reveal anything about when he might step down as Federal Reserve chairman when a reporter asked about his future.
"I don't have anything for you on my personal plans," Bernanke said at the press conference.
He is widely expected to leave his post at the end of his term later this year. President Obama essentially confirmed this departure in an interview with PBS' Charlie Rose earlier this week.
Appointed by President George W. Bush, Bernanke became chairman of the Federal Reserve in Feb. 2006 and began his second term in Feb. 2010 after he was re-appointed by President Obama. Bernanke's second term as chairman ends Jan. 31, 2014 and his term as a board member ends on Jan. 31, 2020.
The Federal Open Market Committee consists of twelve people, consisting of members of the Board of Governors of the Federal Reserve System and Reserve Bank presidents.
The Fed's actions greatly impact the U.S. economy for investors, business owners, consumers and homeowners. Interest rates on loans, stock and bond markets, all react to Fed policy.
"The last thing the Fed wants to do is cause rates to move quickly enough to choke off recovery," says Gus Faucher, senior economist with PNC financial.
Americans have likely already seen the last of rock-bottom mortgage interest rates, but rates are still historically very low, creating a competitive period to buy a home and lock in a low rate.
Markets in recent weeks have been rife with speculation that the Fed will be pulling back sooner than previously expected.
Mortgage rates have also been moving higher, up nearly three quarters of a percent since March.
"The change in mortgage rates we've seen so far are not overly dramatic," Bernanke said during the press conference.
Despite Wednesday’s reassurance by the Fed that there will be no hasty exit from its stimulus efforts, there is no doubt that these efforts will have to come to an end at some point, maybe as early as next year. When the stimulus measures end, interest rates will rise.
"Rates are going higher, we are very close to the day and they are going to rise in a consistent way. If you are looking to buy anything that requires a loan, buy it now and lock in a low rate," says Mark Zandi, Chief Economist Moody's Analytics.
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