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Fed seeks employment opportunities

By Mark Hamrick · Bankrate.com
Wednesday, May 1, 2013
Posted: 2 pm ET

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."

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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.

Lone dissenter

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.

Bankrate Audio

Greg

Mcbride

CFA, Bankrate.com

Mark

Hamrick

Washington Bureau Chief, Bankrate.com

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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