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Fed noiselessly keeps rates low

By Sheyna Steiner · Bankrate.com
Wednesday, October 24, 2012
Posted: 2 pm ET

For consumers and investors, this was not a life-changing meeting of the Federal Reserve's policymaking group. Interest rates will remain painfully low for savers, while borrowers who qualify will find the mortgage rates of a lifetime. Credit card rates will remain low, as will car loan rates.

The federal funds rate, the benchmark interest rate controlled by the Fed, will remain targeted between zero percent and 0.25 percent until mid-2015, and the central bank will continue with Operation Twist through the end of the year.

And the policymaking Federal Open Market Committee will stick with the plan announced at the last meeting: a third round of bond buying, known as QE3, which will funnel $40 billion a month into mortgage-backed securities.

Operation Twist is the maturity extension program in which short-dated securities already owned by the Fed are swapped out for longer-term investments to push down long-term interest rates.

Throw in a presidential election just 13 days away, and it's easy to see why the monetary policy committee decided to keep a low profile this week. Even if there were significant moves to be made, "The election is right around the corner, and they don't want to be perceived as being political," says Robert Barone, Ph.D., partner, economist and portfolio manager at Universal Value Advisors in Reno, Nev.

With all of these influences coming to bear, the committee appeared to be restrained at this meeting. But the Fed is far from inactive, according to the statement released following the meeting.

The combined effect of the central bank's actions "will increase the Committee's holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative," the statement read.

The arguable impact of QE

Interest rates are the main lever of monetary policy, and that switch has been in the off position since December 2008, when the federal funds rate was dropped close to zero percent.

"Typically, monetary policy is adjusting rates and adding or reducing the money supply over each period. We're not operating like that today; we're operating by these massive acquisitions of securities," says Ernie Patrikis, banking partner at the law firm White & Case in New York, formerly general counsel to the New York Federal Reserve.

In September, the Federal Reserve announced a third round of securities purchases. Unlike the first two rounds of quantitative easing, QE3 is open-ended and focused only on the housing market.

The announcement of QE3 had a nearly instantaneous effect on mortgage rates. The day before the September Fed meeting, the average 30-year fixed-rate mortgage was 3.81 percent, according to Bankrate's data. After that, rates fell nearly a quarter of a percentage point. But that's just mortgage rates; the full impact of QE3 will take time to move through the economy.

"The whole rationale behind QE1, 2 and 3 has been and continues to be to stimulate job growth, credit availability, to stimulate housing and stimulate risky markets such as the stock markets and other markets -- commodities, for example," says Werner Bonadurer, clinical professor of finance at the W.P. Carey School of Business at Arizona State University.

"The hope is that it will lead to a higher level of consumer confidence, and that will lead to consumption going up. And if consumption goes up, credit becomes more available," Bonadurer says. "That should trickle through and stimulate the whole economy."

Wait and see

Though the economy has shown some signs of improvement, many economic indicators still point in the wrong direction.

There has been a "reduction in the level of capital expenditures by companies, a slate of recent weak corporate-earnings announcements, there is some industrial production going down, exports are going down, so it is a very mixed picture," Bonadurer says.

The FOMC seems to agree with that assessment. In the statement released following the meeting, economic improvements were noted but tempered with caveats.

"Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has advanced a bit more quickly, but growth in business fixed investment has slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level," the statement read.

With no significant changes, positive or otherwise, since the last meeting and only a question mark looming in the future, this week's meeting was a wash.

The committee members "shouldn't have even come to Washington for the meeting. They could have done it all on the telephone," Patrikis says.

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1 Comment
October 25, 2012 at 10:13 pm

i wont