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Fed charts course through stormy economy

By Mark Hamrick · Bankrate.com
Wednesday, July 31, 2013
Posted: 2 pm ET

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."

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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.

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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.

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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.

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1 Comment
Irv Steinman
April 03, 2014 at 4:20 pm

I am tryinmg to find out what the 10 year note rate was in January 2008

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