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Fed keeps old rates, mulls new QE

By Claes Bell, CFA · Bankrate.com
Tuesday, March 13, 2012
Posted: 2 pm ET

If the recovery ain't broke, don't fix it, at least for now. That was the verdict of the Federal Open Market Committee, or FOMC, Tuesday as it elected to leave the federal funds rate unchanged and to refrain from starting any new monetary easing.

That will help keep rates on consumer loans, such as auto loans and credit card balances, attractive, which is good news for borrowers. But it will also keep yields on savings deposits and certificates of deposit, or CDs, abysmally low.

Federal Reserve building

That the Federal Reserve kept the federal funds rate near zero was expected. In January, the FOMC predicted the federal funds rate would stay low through late 2014.

What is less certain is whether the Fed will undertake further measures to lower long-term interest rates through quantitative easing. Though the Fed elected not to take any new action at this meeting, The Wall Street Journal has reported the Fed is considering a new approach called "sterilized QE," in which the Fed would print money to buy bonds but effectively tie it up by borrowing it back for shorter periods at lower rates without spurring inflation.

The Fed elected not to launch it at this meeting, and three months in a row of favorable employment reports could be playing a role in the Fed's hesitation toward further monetary easing, says Jerry Webman, chief economist for OppenheimerFunds Inc. in New York.

"The economy seems to be doing fine. I think the employment is not great, but OK, and the momentum is in the right direction," Webman says. "I'm not sure there's an action the Fed could take in just reshaping the yield curve or spreads between mortgages and Treasuries, or anything else that would really have a big positive influence on the economy."

But while the Fed is holding off for now, people shouldn't interpret that inaction as a sign the Federal Reserve is completely satisfied with the current state of the economy, says Jim Wilcox, professor of financial institutions at the University of California, Berkeley's Haas School of Business.

"They clearly wish the economy was a lot healthier and faster-growing than it currently is. They wish the housing market was in better shape, the job market was in better shape," Wilcox says. "But I think they're getting, in many ways, about what they thought they would get with the tools they have at hand."

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1 Comment
Rosetta Everett
March 14, 2012 at 11:09 am

It is not fair to the elderly who saved all their lives for their retirement years to keep interest rates near zero.