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."
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.
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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
Mark Hamrick: For Bankrate.com, this is a special report, the Federal Reserve's October meeting. Hello, I'm Mark Hamrick, Washington Bureau Chief for Bankrate. For the first time since the 16-day government shutdown the Federal Reserve has held a policy setting session, and what it decides affects all of us, consumers, borrowers, investors and savers. This meeting did go largely as expected, but we are living in, as they say, interesting times. So what is ahead for the Fed and the economy? There is must to ponder and discuss with Bankrates Senior Financial Analyst, Greg McBride.
Greg, the Fed really seemed to stick with much of the text from its earlier statement and all that points to not much really changing. So for people who are wondering, what do I need to know about the Federal Reserve, they can, I guess, rest assured that as things were before, they are really the same going forward for the near term, right?
Greg McBride: By and large yes, that is the case, the Fed is going to be maintaining the same pace of stimulus, $85 billion a month, which the stock market tends to greet pretty warmly, so it should be good news for the 401(k) for the time being. Ultimately, we will see volatility when they start to scale that back, but that is a worry for another day. One item of note in the Fed statement: They deleted a reference that had been in the previous statement to tightening financial conditions. And what that basically is, is a nod to the fact that mortgage rates have dropped about a half a percentage point since early September.
Mark Hamrick: So why would it want to acknowledge that, is that the Fed saying rates are back down at a level that we want to see them at in the sense of the rates that are set by the marketplace?
Greg McBride: I think what the Fed is saying here is that the level of mortgage rates is not as restrictive as they felt it had been following that sharp run-up over the summer months. Yes, mortgage rates are still higher now than they were earlier in the year, but they have moved back down in a notable fashion, which is really part of the goal of all of this stimulus is to keep those mortgage rates low.
Mark Hamrick: The last Fed meeting, Chairman Bernanke had the opportunity to make spoken comments at a news conference. This time it is only a written statement. What has changed between then and now is of course the 16-day partial government shutdown. And the Fed almost seems to want to walk a really delicate political tightrope there, just referencing sort of the fiscal headwinds.
Greg McBride: That language remained the same as it had been in the September statement, despite, as you noted, the government shutdown and the whole debt ceiling debate that we went through and that we are going to get through again just after the first of the year. Despite that headwind, despite that uncertainty, the Fed did not alter their language, they did not lob any bombs at anybody, despite the fact that fiscal policy is very clearly a strong headwind, maybe the strongest headwind we are facing economically right now.
Mark Hamrick: So to break that down a bit, what we're really talking about is the fact that there is the sequester that causes government spending to not be as robust as it might have been in another environment. And of course, there is the uncertainty about whether Congress and the president can come to an agreement in the coming months. I guess the Fed really does not want to anger anybody, particularly at a time when Vice Chair Janet Yellen is going to be facing a nomination hearing next month.
Greg McBride: And you know, it is another bit of uncertainty that markets are going to have to grapple with. Is the confirmation of Janet Yellen going to go smoothly as had been expected a couple of weeks ago? Or is there going to be some sort of complication that could lead to volatility in the markets? All of that argues for the Fed to maintain their pace of stimulus until the dust settles a little bit and they get a better read on the health of the economy, and what potential headwinds may lie ahead, whether it is in the confirmation process for Janet Yellen, or with regard to the next round of budget and debt ceiling debates.
Mark Hamrick: So in terms of the marketplace, we came into this meeting with yet another record close for the stock market, obviously all the activity by this and other central banks seeming to set the stage for more stock purchases. As we go out in the coming months, do you see much reason that interest rates should change, based on what we can know?
Greg McBride: Not unless we see a drastic change, either in the economic landscape or the Feds tilt towards stimulus. Now what might do that: a sharp jump in inflation – unlikely -- or if we saw evidence of financial bubbles emerging. That could tilt the Feds' bias on this stimulus very quickly. Again, all else being equal, I think the Fed is very inclined toward maintaining this pace of stimulus until they are sure the economy can stand on its own two feet before they start to remove that crutch of stimulus.
Mark Hamrick: And we know that one person on the Federal Open Market Committee again voted against the statement that all the others were willing to vote in favor, how much of a nagging worry do you think the risk of asset bubbles is for the Fed policymakers, collectively speaking?
Greg McBride: I think we're beyond the point of diminishing returns with regards to the stimulus. And so when you get beyond that point, you have to start worrying about unintended consequences. There is one voting member who is voting against the stimulus on those grounds. But there are others that are routinely discussing it and watching it. So not that that's proof that the Fed is going to avoid any sort of collateral damage, but it is clearly something that is on their radar screen.
Mark Hamrick: So we have a news conference to be held by Chairman Bernanke in the month of December. In some ways that may be his opportunity for sort of closing comments for his tenure as Fed Chairman, and we look ahead to the likely confirmation of Vice Chair Janet Yellen as the Chair in the coming months. Do you see that as being a relatively irrelevant transition for the average investor, the average borrower, the average saver?
Greg McBride: Yes, I do think that Janet Yellen very easily slides from the co-pilot seat, over into the captain's chair – minimal change, minimal notice on the part of markets from the standpoint of a lot of continuity with regard to the stimulus. I think that smooth transition aids the benefits that the Fed is putting into effect for the overall economy and for both consumers and businesses specifically.
Mark Hamrick: Greg McBride, thank you.
Greg McBride: Thank you Mark.
Mark Hamrick: You've been listening to special report from Bankrate. Our Editor in Chief is Julie Bandy, Managing Editor, Katie Doyle. Our Editor is Jessica Patel, and thanks to Producer Lucas Wysocki for his work in the studio. For more on the Federal Reserve and other issues relating to personal finance, visit Bankrate.com and you can follow us on Twitter @Bankrate. Catch our weekly podcast, "Your Money This Week," free downloads from Bankrate and iTunes. I am Mark Hamrick, thanks for listening.
W,next only for gold&silver 2014-15?
Same question... does it mean it's good time to re-finance? Any chances of interest rate going low next year.
Is it good for Mortgage rates? Are the mortgage rates going to go down?