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Fed keeps rate policy on hold

By Mark Hamrick · Bankrate.com
Wednesday, October 30, 2013
Posted: 2 pm ET

The Federal Reserve is sticking to its program combining $85 billion in monthly asset purchases with low interest rates hoping to encourage economic growth. The strategy has recently been stymied by the partial government shutdown and the prospect of another prolonged budget fight.

In the statement released after a two-day policy-setting session, the Federal Open Market Committee, or FOMC, said that the economy recently continued to grow at a moderate pace. Over the past year, the Fed has been buying $45 billion of Treasury securities and $40 billion of mortgage-backed securities each month, often referred to as "quantitative easing." The policymaking group says it "decided to await more evidence that progress will be sustained before adjusting the pace of its purchases." At the same time, benchmark interest rates remain parked at record-low levels, and the Fed is not expected to begin raising rates before 2015.

The statement says the FOMC "reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens."

No slowing of purchases

For the September meeting before the shutdown, there was speculation that the Fed might signal plans to slow the asset purchases. But the signal was not given and some of the Fed's fears were confirmed as the 16-day shutdown unfolded. With growth thought to still be struggling, many analysts don't expect a slowing of asset purchases until next year.

Alone in voting against the statement was Esther George, president of the Federal Reserve Bank of Kansas City, who has objected to the statement in the past.

Removed from the statement

A reference to rising mortgage interest rates referring to "the tightening of financial conditions" included in the September statement was not included in the latest version. Bankrate Senior Financial Analyst Greg McBride, CFA, calls that "a nod to the fact that mortgage rates have dropped about a half a percentage point since early September."

Uncertainty prevails

The Fed statement makes no direct reference to the budget problems in Washington, repeating that "fiscal policy is restraining economic growth." Uncertainty tied to the federal budget process is a "big negative going into the Christmas holiday season," says Lynn Reaser, chief economist at Point Loma Nazarene University. "No one at this point knows exactly how severe that might be," says Reaser. The Conference Board reported this week that consumer confidence slumped sharply in October, with expectations particularly hard hit.

The shutdown delayed release of economic data that would provide further insight on the financial toll. The Labor Department reported that payrolls expanded by 148,000 jobs in September. Analysts expect when the delayed October report is released Nov. 8, it will show hiring instead slowed further.

The Fed's Beige Book survey, released earlier this month, was not delayed. Data collected through the first week of October found that consumer spending generally continued to increase. At the same time, some employers were reported cautious because of uncertainty tied to fiscal policy and implementation of Obamacare.

Prospects for near-term improvement of the economy, including the job market, don't look promising. Economist David Wyss, an adjunct professor at Brown University says, "I think the economy is sort of continuing this half-speed recovery that we have seen for the last few years. It is still improving, but it is improving at a very slow pace and I think that is going to continue, especially with all (the) uncertainty in Washington."

Bernanke era ending

There is only one more Fed meeting scheduled this year, with Chairman Ben Bernanke's term set to end in January. He's to hold a news conference after the next meeting. President Barack Obama has nominated Vice Chair Janet Yellen to succeed Bernanke, with a confirmation hearing expected next month. Sen. Rand Paul, R-Ky., is threatening to hold up the nomination until there's a vote on legislation aimed at forcing a fuller audit of the Fed.

If Yellen is confirmed as expected, Reaser says the first female head of the U.S. central bank will face plenty of challenges. At the top of the list is how to wind down the asset purchases. Reaser says Yellen is "taking possession of a very difficult task in terms of designing an exit strategy that has not been fully defined in terms of the triggers that would cause it to happen."

Wyss says the Fed may feel some heat when interest rates eventually rise from record lows. "It is not completely politically independent. It is a creature of Congress. Nobody living inside the Washington Beltway is independent of politics," he says.

Follow me on Twitter: @hamrickisms

Bankrate Audio

Mark

Hamrick

Washington Bureau Chief, Bankrate.com

Greg

McBride

CFA, senior financial analyst, Bankrate.com

The Fed's game plan: What does it mean for you?

With the Fed keeping on its course, Greg McBride and Mark Hamrick discuss how it could affect consumers and the U.S. economy.

LISTEN TO AUDIO

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4 Comments
suresh
October 31, 2013 at 1:15 pm

W,next only for gold&silver 2014-15?

BG
October 30, 2013 at 3:48 pm

Same question... does it mean it's good time to re-finance? Any chances of interest rate going low next year.

Chris
October 30, 2013 at 2:19 pm

Is it good for Mortgage rates? Are the mortgage rates going to go down?