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Fed sticks with near-zero rate

By Claes Bell · Bankrate.com
Tuesday, December 13, 2011
Posted: 2 pm ET

Today the Federal Open Market Committee, or FOMC, came together for a quiet meeting, leaving the key federal funds rate unchanged at near-zero percent, as expected through mid-2013.

The federal funds rate is the rate at which banks lend to each other.

The FOMC's statement reflected cautious optimism about the U.S. economy in the wake of some positive numbers on unemployment, manufacturing and retail sales.

Positive signs

"Three months ago there was significant concern that we might see a double dip, both because of risks coming from Europe but also from economic indicators suggesting the economy was shaky," says Karen Dynan, vice president and co-director of economic studies at the Brookings Institution. "Since then, the economic indicators for our country have mostly been on the positive side, and so those concerns about a double dip are greatly reduced."

However, the Fed statement continued to express reservations about the downside risk presented by the current eurozone debt crisis.

"It's a big deal," says Ricardo Reis, professor of economics at Columbia University. "Europe is a big market for U.S. goods, and a lot of U.S. institutions are extremely exposed to Europe."

Reis says businesses here are linked to European markets through sales, lending and investments, and that spells trouble should the eurozone prove unable to find a way out of the current crisis.

Is Fed ready for action?

While the Fed has taken steps to address the situation by lowering the rate they charge central banks to borrow dollars, you can bet the Federal Open Market Committee spent some time considering its options should the situation worsen, says Andrew Busch, global currency and public policy strategist at BMO Capital in Chicago.

"They have to be prepared to act should the European debt crisis devolve further," says Busch. "They can't really address the solvency issue the sovereigns in Europe have and the same with the European banks. That's where they're a little bit limited."

Despite the climate of deep uncertainty, the FOMC meeting today didn't yield much in the way of big initiatives to put the global economy on more solid footing. With the key federal funds rate close to zero and Operation Twist working to directly push down rates on longer-term loans, it's not surprising the Fed passed on enacting more monetary stimulus.

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3 Comments
Barbara M
December 22, 2011 at 12:36 pm

Zero interest rate sure doesn't help the senior citizens whose only income is bank interest. AND prices for everything keep going up so it is a backward slide or more like a free fall!

I agree with Natalie S. Why keep doing something that definitely isn't working?

What makes me even sicker is the high salaries of bank execs and corporate officers.

Sandie
December 14, 2011 at 10:07 am

It's all a con! So what if the Fed keeps interest rates low! Just try getting a refinance! No one wants to lend money because the prospect of long term loans (mortgages) at such low interest rates represents loss of income to the lender. No one wants to lend at such low rates ~ the banks and other lenders are all waiting for the rates to go back UP at which time refinancing will become a whole lot more easier. Right now, if a borrower doesn't have PERFECT credit, you ain't getting a refi. And that's a fact.

Natalie S.
December 14, 2011 at 12:54 am

Let's see...low interest rate, my money earns next to nothing...
no earnings, I don't spend anything....I don't spend anything...
no sales taxes...no earned income, no income taxes. What's
wrong with this picture?? Has the next-to-nothing interest rates
done anything for the economy in the past few years...a big NO.

Wake up all you experts and look at the plain math!! Keeping
the rates low to help business, hasn't worked...see the increased
unemployment rates and the continuing cutting of employees.
This plan is just plain idiotic!!