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Low rates until 2013

By Marcie Geffner · Bankrate.com
Tuesday, August 9, 2011
Posted: 4 pm ET

Banking customers hoping for higher interest rates on savings accounts and deposit certificates got another bonk on the head Tuesday from the Federal Reserve, which said it plans to keep a key interest rate at the current level for another two years.

The Federal Open Market Committee decided to keep its target range for the federal funds rate at zero percent to one-quarter percent and said in a statement that economic conditions were "likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."

That was a major departure from the Fed's longstanding guidance that economic conditions are "likely to warrant exceptionally low levels for the federal funds rate for an extended period."

The decision wasn't unanimous. Fed Chairman Ben Bernanke and six committee members voted for the statement while three other committee members wanted to stick with the usual wording.

In its statement, the Fed explained that economic growth has been "considerably slower" than expected. The labor market has deteriorated, unemployment has risen, household spending has flattened out and housing remains depressed. On the flip side, business investment in equipment and software continues to expand and inflation has moderated, with longer-term expectations remaining stable.

Earlier this week, the Fed, along with the Federal Deposit Insurance Corporation, National Credit Union Administration and Office of the Comptroller of the Currency issued a joint statement noting that Standard & Poor's had lowered its long-term rating of U.S. government debt from AAA to AA+ and saying the risk weights for bank risk-based capital purposes "will not change."

The hold-steady policy applies to Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies and government-sponsored entities. That last category refers primarily to Fannie Mae and Freddie, the two mortgage securitizers operating under government conservatorships.

In effect, the regulators disregarded the rating agency's downgrade and stuck with the story that U.S. debt hasn't become a riskier asset for banks to hold as capital.

On the one hand, they may be well be correct. On the other hand, it's not altogether surprising that the government believes the government itself is the paragon of creditworthiness. If there were a third hand, skeptics might suggest the whole debate has been academic or politically motivated.

What's your take?

Follow me on Twitter: @marciegeff

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1 Comment
joe
August 10, 2011 at 4:59 pm

so we are gonna stay the course, whats been our course? economic failure. Lets continue with the downturn, great!