The Federal Reserve, taking a fresh look at the economic tea leaves, has decided that a cocktail of record-low interest rates and billions of dollars in monthly asset purchases is still warranted.
The Federal Open Market Committee, or FOMC, is holding the target for the benchmark federal funds rate between zero percent and 0.25 percent. That means that borrowers will continue to have the balance of power over savers, who've suffered through low returns for years as the central bank has worked to lift the economy from the worst crisis since the Great Depression.
Monetary policy statements seldom are vehicles for political pleading, but this time, the committee said, "fiscal policy is restraining economic growth." This is likely to be interpreted as a criticism of the politics of austerity. In the previous meeting, the FOMC phrased this sentiment less emphatically, complaining that "fiscal policy has become somewhat more restrictive."
For months, the Fed has been buying $85 billion a month in mortgage and government bonds. Observers have been speculating about the timing of when the Fed will throttle back on those bond purchases, but the FOMC hinted that the next step could be to increase bond purchases: "The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes."
The Fed's purchases of $40 billion per month in mortgage-backed securities, combined with $45 billion in longer-term Treasury paper, are an attempt to boost the economy now that short-term interest rates have been pushed to their lowest-possible limit.
Good news, bad news on rates
For those consumers who can gain access to credit, the Fed's low-rate policy means lower financing costs associated with purchases of homes and automobiles. Indeed, strength in housing and auto sales have provided support to the U.S. economy in recent months. The Standard & Poor's/Case-Shiller home-price index report, released Tuesday, found that all 20 cities covered by its major-metro survey had year-over-year home price gains for two straight months or more. Also, sales for the major automakers, reported Wednesday, were expected to mark the strongest April since 2007.
For savers, the story is one of miserly returns. Nationally, the average rate on a one-year certificate of deposit is 0.25 percent, according to Bankrate.com's weekly survey.
Job market worries
High unemployment, by contrast, continues to plague the nation's economy. In its statement, the FOMC said it expects the "exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5 percent." It pledges that when it begins to shift its policy, it will do so keeping in mind its dual goals of "maximum employment and inflation of 2 percent." The April unemployment report is due Friday. The March jobless rate was 7.6 percent.
The lone dissenter on the FOMC, opposed to the combination of low rates and asset purchases, continues to be Esther George. The president of the Federal Reserve Bank of Kansas City, Mo., is concerned that Fed policies risk causing problems with the economy, including inflation.
This was the policymaking body's third round of meetings this year, occurring over the past two days. The next meeting is scheduled for June 18 and 19.
FED UPDATE: What keeps Ben Bernanke up at night?
Fed policy delivers sweet dreams to borrowers, but provokes nightmares in savers. Learn why in this brief chat between our two analysts.
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Hello, I'm Mark Hamrick, Washington Bureau Chief for Bankrate. The Federal Reserve's Open Market Committee has wrapped up a two-day policy-setting session in Washington, and to virtually no one's surprise, its opted to keep interest rates at record-low levels. The Fed's written statement is always mined for indications on future actions that will affect consumers, savers and investors alike. Joining me now is Bankrate's senior financial analyst, Greg McBride.
Greg, one thing that strikes me here about the Fed's statement is that it acknowledges the economy has been expanding at what it calls a "moderate" pace, but it continues to keep an eye on unemployment --and that certainly is nowhere as low as the Fed wants it to be, right?
Greg McBride: Yes. Look, there is really nothing to compel the Fed to change their current course. The economy is still growing very slowly. The labor market is not anywhere near where they want it to be. And oh, by the way, the stock market keeps going up and the housing market is in a rebound. So there is really nothing there that is going to cause the Fed to change course.
Mark Hamrick: I think that is right and there is much attention on the Fed's monthly asset purchases totalling $85 billion a month, continuing to expand that balance sheet $1 trillion in the past year. There has been a lot of speculation Greg, about when the Fed might begin to taper or reduce those asset purchases. And while it did change its language a little bit here, there is certainly no strong indication that it wants to do any fine-tuning there anytime soon, right?
Greg McBride: No, not at all. In fact, what they did was they put a little something in the statement that basically says, "Hey look, if this slower pace of inflation turns out to be anything more than just lower energy prices and lower gasoline prices, we may actually ramp up the amount of stimulus so that we can avoid that dreaded deflationary spiral."
Mark Hamrick: Yes, that is right. Because for those of us that watch this thing, we know that the Fed has its so-called dual mandate, which is lower unemployment. But it also actually has a target for inflation that it is not hitting now, so by some measure inflation is too low for the Fed right now. Right, Greg?
Greg McBride: Yes. What Ben Bernanke's biggest fear is, and what keeps him awake at night, is that we end up like Japan. We end up with prices actually falling, deep deflation. Because in that scenario, people do not buy stuff today if they think it is going to be cheaper tomorrow. So all this effort that the Fed has done to generate economic growth is also designed to generate a little bit of inflation so that people do go out and do the type of spending that we need to move this economy forward.
Mark Hamrick: Now for savers, the low rates have been a curse and that curse is continuing, Greg, so the outlook really there doesn't change.
Greg McBride: Yes. Look, if you are a saver, Ben Bernanke has thrown you under the bus and now he is backing up over you. But if you are a borrower, you have a 401(k), you own your house -- these conditions have actually been pretty favorable and the Fed is certainly going to make those conditions continue.
Mark Hamrick: Not so bad for consumers though, if they want to buy a house or a car, assuming they can get access to credit at reasonable rates -- they will continue to do that, Greg.
Greg McBride: Yes, great for borrowers. Rates are at record lows, and most people have good enough credit that they are able to borrow at the lowest rate they've ever seen. So down payments, I think, are going to be the biggest hurdle. It's certainly not going to be interest rates.
Mark Hamrick: The Fed's next policy-setting session is scheduled for mid-June and after that meeting, Chairman Ben Bernanke is to hold one of his regular news conferences. I have been speaking with Bankrate's senior financial analyst, Greg McBride. Greg, thank you. I am Mark Hamrick, Washington Bureau Chief for Bankrate. For more on this and other personal finance issues, visit Bankrate.com.