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The Fed keeps its foot on the pedal

By Mark Hamrick · Bankrate.com
Wednesday, June 19, 2013
Posted: 2 pm ET

With unemployment at 7.6 percent and above the Federal Reserve's target, the central bank has its foot stuck on the economic accelerator. Wrapping up a two-day meeting, Federal Reserve policymakers led by Chairman Ben Bernanke are keeping short-term interest rates at record lows while maintaining $85 billion in monthly asset purchases.

The statement from the Federal Open Market Committee, or FOMC, was released amid rising anticipation of an eventual slowing of the asset purchases. In the statement, the Fed says that while there's evidence that economic activity "has been expanding at a moderate pace," the central bank is keeping the program in place "to support a stronger economic recovery."

Fed keeps some cheering, others jeering

The Fed's latest decision presents something of a mixed bag for consumers, investors and savers, continuing a pattern that has largely been in place since the 2007-2008 financial crisis. Low interest rates can be a boon for homebuyers and other borrowers but provide a poor return for those looking to stash cash in a relatively safe manner, such as with a certificate of deposit.

Bankrate's weekly survey finds the average rate on a one-year certificate of deposit is less than 0.25 percent. Meanwhile, mortgage rates, though still low, jumped for a sixth straight week as the Fed's latest verdict was awaited.

The central bank has been buying $40 billion in mortgage-backed securities and $45 billion in long-term Treasury bonds per month.

While there have been indications that the Fed could soon taper its asset buying, the statement says policymakers are "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 says its actions "should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative."

Economy improving but could be better

As the Fed noted, there has been improvement on a number of financial fronts. The housing market continues to gain traction, with sales and prices on the rise. The stock market remains near record highs, and consumer confidence is at a five-year high. But persistently high unemployment remains the Fed's top concern, while inflation pressures are still low.

The FOMC says it "sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall." The statement goes on to say that policymakers expect "economic growth will proceed at a moderate pace and the unemployment rate will gradually decline."

In a projection released with the statement, the Fed says it now anticipates unemployment of between 6.5 percent and 6.8 percent during 2014. In March, the central bank had estimated somewhat higher joblessness next year, in a range of 6.7 percent to 7.0 percent. The Fed's target is an unemployment rate of 6.5 percent.

Paul Edelstein, director of financial economics at IHS Global Insight, says the Fed's policies are having a positive impact but also reflect a difficult emergence from the economic crisis. He points out that low interest rates "are indicative of a very weak economy and expectations of a weak economy to persist."

"If people were optimistic in the outlook," Edelstein says, "then what we would see is interest rates actually move higher as investors move out of the safety of bonds into riskier assets, such as stocks."

George still on the outside

FOMC member Esther L. George reliably dissented from the statement. She has been a "no" vote consistently this year, and the statement says she remains concerned about inflation expectations.

This time, she was joined by James Bullard. The statement says he "believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings."

The Fed's next scheduled policy-setting session is set for the end of July.

Follow me on Twitter: @hamrickisms.

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5 Comments
Jeff
June 24, 2013 at 9:58 pm

"With unemployment at 7.6 percent" -- Woops ! this seems way out of reason.

More like 21% unemployment and still in deep recession.

Funny how no one in the media will say depression or any unemployment rate over 10% , as if there is a guideline in place for those numbers and the words , Depression.

Betty
June 19, 2013 at 5:17 pm

Guess, I have awhile yet to decide if I want to purchase a new vehicle as it looks like interest rates will stay low for awhile.