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Fed keeps short-term rates low

By Claes Bell, CFA · Bankrate.com
Wednesday, April 25, 2012
Posted: 12 pm ET

If the third time is the charm, how about the 35th?

For the 35th consecutive meeting, the Federal Open Market Committee today left the federal funds rate in a range of zero percent to 0.25 percent, where it was set in December 2008.

Federal Reserve meets

The decision by the Fed's rate-setting body to keep rates unchanged comes even as figures coming out of the U.S. economy have improved, says Peter Ireland, professor of economics at Boston College.

"So far this year, the U.S. economy has been performing surprisingly well. And for the first time, actually, the good economic numbers have extended beyond, say, manufacturing output … and extended down to the employment figures as well," Ireland says. "So all of that is great news and would suggest the Fed can just sit tight and wait and see or maybe even start thinking about exit strategies again."

So why didn't the Fed declare victory and move up the timetable for raising rates? After all, if the economic recovery is picking up steam, keeping a near-zero federal funds rate could spark inflation.

The answer comes down to recent economic reports that have muddied the waters for Fed prognosticators, Ireland says.

"It kind of looked like things were picking up at this time last year, too, and then recovery began to falter in the spring and through the summer," Ireland says. "Kind of feeding into those fears, we had a disappointing payroll employment number for April, and the claims numbers have not been all that great the past few weeks. So that kind of pushes things back toward maybe something like QE3"

"QE" refers to quantitative easing, or the Fed's strategy to inject cash into the economy by buying government securities in the open market.

Until the economic data collected by the Fed begin painting a clearer picture of the direction the economy is heading, the Fed is right to take a wait-and-see approach, Ireland says.

"I do not think that there is enough evidence right now to justify a real, practical change in policy, whether you mean an announcement of more quantitative easing or an extension of the low interest rate policy even further into the future," Ireland says.

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