The Federal Reserve says it will keep pushing down on long-term interest rates until the job market improves as long as inflation remains low.
Translation: The so-called QE3 program, in which the Fed buys $85 billion a month in mortgage-backed securities and Treasury notes, doesn't have an expiration date yet. The central bank will cut back on the bond purchases only after "the outlook for the labor market has improved substantially in a context of price stability."
FED UPDATE: Bond-buying will continue until morale improves
Think inflation is too low? The Fed believes it is. Bankrate financial analyst Greg McBride explains what that means for interest rates.
LISTEN TO AUDIO
Mark Hamrick: From Bankrate.com, this is Special Report, the Federal Reserve.
Hello, I'm Mark Hamrick, Washington Bureau Chief.
The nation's central bankers have weighed in on the state of the economy and the status of interest rates. Ultimately, what the Federal Reserve does affects all of us: consumers, savers, borrowers and investors.
The Fed's written statement following its two-day session makes mention of an economy that has expanded at what it calls a modest pace. It also notes mortgage rates have risen somewhat. But in many ways, it is just more of the same.
What the Fed didn't say is also noteworthy. There was no mention of an immediate scaling back of the $85 billion in monthly asset purchases. It continues to say that asset purchases will continue until the job market has improved substantially.
This is not one of the meetings where Chairman Ben Bernanke meets with reporters, so essentially, all we have to go on right now is the official written statement.
We hope you'll stick around.
So, we're going to dive into what all this means with my Bankrate colleague, Greg McBride, our senior financial analyst.
Greg, what are we to make of all of this?
Greg McBride: Well, I think what we've seen here is a pledge from the Fed to basically do more of the same. They're going to continue the $85 billion a month in bond-buying stimulus, and they've reaffirmed, I think offered a greater commitment to what they call accommodative policy going forward.
And that really means two things. Not only that bond-buying stimulus in terms of long-term debt but that also keeping short-term interest rates at these near-zero levels. I think in all likelihood we're probably looking at another couple of years on that front.
One other point, Mark, I think was significant in this statement. They did note the economic risks of low inflation. Of course, this was a point of contention at the June meeting. It's made its way into the statement here for the July meeting. And that, if anything, argues for the Fed to continue their pace of stimulus, not dial it back anytime soon.
Mark Hamrick: So Greg, breaking it all down, relatively low rates remain in place for savers and for borrowers. So in many ways, as you said, we are seeing more of the same going forward.
Greg McBride: Yes, and I think of significance for stock market investors. The stock market's had a great run so far. It's up almost 20 percent year-to-date and largely on the back of this Fed stimulus. And you know, basically the Fed is not looking to take that punch bowl away. So, I think it's, you know, not only the same forecast for low rates but the same forecast for continued stimulus that's been so beneficial to the equity markets.
Mark Hamrick: So I was going to put you on the spot here, Greg. Fast forward to mid-September, that's when we have the next Fed meeting and also a news conference with Chairman Bernanke.
If we continue to get, you know, OK economic data, do you think we hear more specifics about phasing out asset purchases then?
Greg McBride: Well, we may hear more specifics, but I don't think it's going to start then simply because if you look at just between now and the last meeting in June, we have not seen any change in the underlying economic fundamentals.
We still have a slow growth economy with high unemployment and low inflation. And so unless that cocktail changes dramatically over the next couple of months, I think the Fed's going to have a difficult time starting to scale back their stimulus at their September meeting. They may well seize the opportunity to talk more about it.
But in all likelihood, as long as we have that backdrop of slow economic growth, high unemployment and low inflation, I think that argues for the Fed maintaining their pace of stimulus. And I think it will be later this year, if not 2014, before they actually do start to scale it back.
Mark Hamrick: Greg McBride, Bankrate's senior financial analyst. Thank you.
Greg McBride: Thank you, Mark.
Mark Hamrick: So again, the Federal Reserve's next meeting is in mid-September. After that two-day meeting, Chairman Ben Bernanke will hold a news conference. And after that, there will be only two more meetings this year: in October and December.
Chairman Bernanke's term ends in January and there's much speculation on his possible successor. It seems to be coming down to a choice of either Fed Vice Chair Janet Yellen or former Treasury secretary, Larry Summers. President (Barack) Obama said he has not made up his mind as of yet.
Ultimately, the president does have to make the decision and the appointment must be confirmed by the Senate.
You've been listening to Special Report from Bankrate. Our editor in chief is Julie Bandy. Managing Editor, Katie Doyle. Assistant managing editor, Holden Lewis. And thanks to producer Lucas Wysocki for his work in the studio.
For more on the Federal Reserve and other issues pertaining to personal finance, visit Bankrate.com. You can follow us on Twitter at @Bankrate. You can also catch our weekly podcast, Your Money This Week.
I'm Mark Hamrick. Thank you for listening.
The economy is expanding at a modest pace, according to the Federal Reserve's rate-setting committee, which pledges to keep short-term interest rates at record-low levels.
In its statement, the Federal Open Market Committee says it plans to keep its target for the federal funds rate near zero percent at least as long as the unemployment rate remains above 6.5 percent and inflation is projected at no higher than 2.5 percent. In June, the unemployment rate was 7.6 percent, and consumer prices were 1.8 percent higher than they were a year before, as measured by the consumer price index.
The Fed's statement notes that low rates will be called for as long as inflation remains under control.
An uneven economy
The Fed's decisions come as the economy shows uneven performance, weighed down in part by sputtering economies in Europe and China. U.S. annualized growth in the first quarter of this year was just 1.1 percent, as revised lower by the Commerce Department. In the most recent quarter, the government pegged growth at an annual rate of 1.7 percent. Economists believe growth will likely be weaker than that for the current quarter. That would make three consecutive quarters with gross domestic product running below 2 percent.
Jobs healing slowly
The Fed notes that the job market is improving. The Labor Department reported that employers added 195,000 jobs in June, compared with an average monthly gain of 182,000 over the previous 12 months. With the unemployment rate at 7.6 percent, the government estimates that 11.8 million people were out of work, figures little changed since the beginning of the year.
Asset purchases since September
Since September of last year, the Fed has been purchasing $85 billion in assets each month -- $40 billion in mortgage-backed securities and $45 billion in Treasury securities. There had been speculation that, in this statement, the Fed would offer hints about the timetable for cutting back on those bond purchases. But the Fed did no such thing:
"The committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability," the statement read. "The committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes."
Savers suffering, mortgages higher
Low interest rates have been a drain on savers in the wake of the 2007-2008 financial crisis. Bankrate's weekly survey finds the average yield on a one-year certificate of deposit is just around 0.25 percent, unchanged from the last Fed meeting, in June. Mortgage rates have been rising in anticipation of adjustment in the Fed's asset purchases. Bankrate's survey indicates the 30-year fixed-rate mortgage averages 4.59 percent, close to the highest in two years.
Bernanke's final months
Three Fed monetary policy meetings remain on this year's schedule. Two of them include news conferences with Chairman Ben Bernanke, whose term ends in January. Vice Chair Janet Yellen continues to be seen as his likely successor. A series of reports has touted Larry Summers, who was Treasury secretary in the Clinton administration, as an alternative to Yellen. But Summers would be seen as more of a departure from Bernanke's consensus-driven approach.
"Summers is a great intellect, but I personally am leery of his ability to put his foot in his mouth and try to dictate." says Scott Anderson, chief economist for Bank of the West. "I think Bernanke has cultivated a very democratic FOMC process and I think he would like to see that continue." Anderson says that suggests that Yellen likely remains the favorite. The decision is ultimately up to President Barack Obama, subject to Senate confirmation.
Follow me on Twitter @hamrickisms.