Savers are still out of luck. The Federal Open Market Committee, or FOMC, at the Federal Reserve, bit off another chunk of its economic stimulus, reducing it by another $10 billion per month.
As the Fed reduces its monthly monetary stimulus, Fed Chair Janet Yellen will be watching for signs of inflation. (Charles Dharapak/Associated Press)
The federal funds rate, the rate at which depository institutions lend funds overnight to each other, remains untouched, targeting between 0 and 25 basis points. That will keep yields on savings vehicles such as certificates of deposit and bonds at record lows, but the cost of borrowing will stay low, as well.
The second piece of big news from today's Fed meeting is that the central bank is continuing to edge out of the economic accommodation known as quantitative easing, or QE. For the fifth time, the Fed will reduce asset purchases by $10 billion, according to the monetary policy statement. The central bank began tapering monthly purchases in December.
Starting next month, bond purchases will fall from $45 billion to $35 billion. The Fed will buy $15 billion worth of agency mortgage backed securities and $20 billion of long-term Treasury securities, down from $20 billion and $25 billion respectively.
Prices are up
In the statement released today, the FOMC offered an optimistic reading of some of the economic developments since the April meeting. "Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months," the monetary policy statement read.
Heading into today's meeting, Sterne Agee chief economist Lindsey M. Piegza expected the FOMC to give a nod to improvements without being overly optimistic, "given the fact that we have already seen a pullback from the March highs we saw in spending and investments."
Inflation, long a thorn in the side of the FOMC, could be heating up. In April, the Fed's favored inflation measure, personal consumption expenditures, or PCE, indicated a year-over-year inflation rate of 1.6, up from 1.1 in March. Another measure of inflation, the consumer price index, or CPI, shows core inflation up 2 percent year over year.
The FOMC has set 2 percent as a key threshold for price stability.
"Two questions are: First-quarter GDP was very weak. Was it just a temporary setback? Second, what is the committee's view of economic growth going forward and, importantly, wage and price growth?" says Francis E. Warnock, professor of business administration at Darden School of Business at the University of Virginia.
Wages are down, and who can afford houses?
Prices are going up, but the earnings of most Americans aren't. Real average hourly earnings fell 0.2 percent in May and are down 0.1 percent from May 2013, the Labor Department reported this week.
The bumpy recovery in the housing sector has yet to smooth out. Last week, the Commerce Department released new housing starts from May, which were down 6.5 percent from April but up 9.4 percent over May 2013. Permits were down 6.4 percent from the April measure and 1.9 percent lower than one year ago.
In April, the most recent month for which they have data, sales of existing homes were 6.8 percent lower than a year previous.
Hawks vs. doves
With inflation potentially on the upswing, will there be signs of a hawk–dove split at the Federal Reserve? For now, the committee is still on the same page when it comes to monetary accommodation and keeping interest rates low for a long time after the QE program ends. In her first press conference as chairman, Janet Yellen hypothesized that the first rate increase could come in mid-2015.
"The problem is that no one believes they are serious. As soon as the economy starts growing at a fast pace or there's a strong housing recovery or there's any indication of anything bubbly -- there will be a temptation to raise rates more quickly," says Charles Weise, professor of economics at Gettysburg College in Gettysburg, Pennsylvania.
If inflation begins to bump up against the committee's 2 percent threshold, inflation hawks on the FOMC could have reason to press for a quicker timetable on monetary policy tightening. In other words, the Fed may feel pressured to raise rates sooner than many on the committee would like.
"There is a fairly strong minority that is really concerned about inflation and financial stability. In recent years, whenever there's been concern about financial stability, the hawks have sort of made their voices heard and the Fed has not taken the types of aggressive action that they need to because of resistance from that segment," Weise says.
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Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.