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Fed sees downside risk to economy

By Mark Hamrick · Bankrate.com
Wednesday, January 30, 2013
Posted: 3 pm ET

As promised, the Federal Open Market Committee, or FOMC, will keep interest rates at superlow levels in hopes of driving down unemployment.

The Federal Reserve is sticking with a target for the benchmark federal funds rate between zero percent and 0.25 percent. One result of the policy is that the nation's mortgage rates will remain near record lows.

The downside to these low rates is that people who save their money in certificates of deposit and other "safe" savings vehicles feel punished. Nationally, the average rate on a one-year certificate of deposit this week is 0.27 percent, according to Bankrate.com's weekly survey. In October, Bernanke defended low rates that pay low returns to savers by saying that a more-robust economy would benefit everyone, including savers.

In its statement, the FOMC said "growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors." Scott Brown, chief economist for Raymond James & Associates, says the "pause" is a reference to a 0.1 percent decline in fourth-quarter economic output, announced earlier in the day.

The "weather-related disruptions and other transitory factors" refer to the impact of Superstorm Sandy and year-end concern about the "fiscal cliff."

The central bank also continued with its stance that the low-rate target range will be "appropriate" as long as the unemployment rate remains above 6.5 percent. In December, the jobless rate was 7.8 percent.

The Fed pledges to continue buying $40 billion a month of mortgage-backed securities as well as $45 billion of longer-term Treasury bonds monthly, aiming to help the economy recover. Critics -- including Jeffrey Lacker, president of the Richmond Fed bank -- have said that the Fed's bond-buying policies threaten to ignite inflation. The FOMC says it expects inflation to remain at or below its target of 2 percent.

The Fed plans to continue with its third round of asset purchases -- known as quantitative easing, or QE3 -- until it sees the labor market "improve substantially."

"The majority opinion is that the job market is not where we want it to be," Brown says. "That gives them room to keep the gas pedal all the way to the floor."

Brown adds that "not all of the Fed officials are really happy about all of the asset purchases." The lone FOMC member opposing the action was Esther George, president of the Kansas City Fed. She is "concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations," according to the statement.

With the annual rotation of Fed presidents, Lacker is no longer a voting member of the FOMC. He had been the sole dissenting vote on the policymaking body last year, opposing asset purchases and the portion of the statement calling for exceptionally low rates. He was one of four Fed bank presidents who left the committee at the end of 2012, as scheduled, and George is one of the four replacements.

The next scheduled FOMC meeting is March 19 and 20. At that time, Chairman Ben Bernanke is to hold a news conference and the Fed will release a summary of economic projections.

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Barb Moore
February 07, 2013 at 4:07 pm

Seniors spend a lot of money because they have time but you are taking away from there resources to spend that money. If they spend money, it will create more jobs. It doesn't seem to me that keeping CD rates low hurts anybody but the middle income and like everyone else says, keep doing what they are doing and we may get government help.

January 30, 2013 at 8:48 pm

My thoughts exactly! I was self-sufficient until CD rates fell to .25%. Now I have practically no income and will become a burden on the government. Keeping interest rates low should have worked by now if it were going to help the economy.

Kenneth Pratt
January 30, 2013 at 7:40 pm

By eliminating the CD rate for Seniors I will soon be able to qualify for entitlements: such as Medicaid,Food Stamps,Heating Help and tax relief.

So Central Bank keep the pressure up on the Retirees