The Federal Reserve kept its target for a key short-term interest rate near zero percent and reiterated that it will do whatever it takes to promote economic recovery and keep prices stable. The central bank said the economy continues to get worse, but not as quickly as before.
As everyone expected, the Federal Open Market Committee kept its target for the federal funds rate between zero percent and 0.25 percent. Banks make overnight loans to one another at the federal funds rate, which has been near zero percent since mid-December. The Fed has said it plans to hold the overnight rate near zero for “an extended period” in an effort to stimulate the economy.
This rate policy statement was subtly more optimistic than the last one, held April 29. In today’s statement, the Fed said outright that “the pace of economic contraction is slowing.” On April 29, the Fed had said that “the economy has continued to contract, though the pace of contraction appears to be somewhat slower.”
The difference between the two statements reflects a minor change in attitude, not a change in direction.
Long-term interest rates and bond yields have risen recently. Some observers speculate that rates went up because investors were concerned about a renewal of inflation over the medium and long term. Those investors might be dissatisfied that the Fed said it “expects that inflation will remain subdued for some time.” The Fed reiterated what it said after the last meeting, that it forecasts “a gradual resumption of sustainable economic growth in a context of price stability.”
Normally, the Fed sets a target for overnight rates and lets the market determine long-term interest rates, such as for mortgages. That has changed. Since March, the central bank has spent hundreds of billions of dollars to push down mortgage rates and long-term Treasury yields. Holding down long-term rates and encouraging homeowners to free up some spending money by refinancing their mortgages were seen as economy-boosters.
But 10-year Treasury yields and 30-year mortgage rates have been rising in the past three weeks or so, putting an end to a mortgage refinancing boomlet. Investors wondered whether the Fed would address those rising rates in this policy statement, maybe by announcing even more purchases of mortgage-backed securities and Treasury debt.
Holds to buy-backs, too
Such an announcement did not materialize. The Fed merely summarized its commitment to buy up to $1.25 trillion in mortgage-backed securities by year’s end and up to $300 billion in Treasuries by autumn.
That didn’t surprise Richard DeKaser, an economist and president of Washington, D.C.,-based Woodley Park Research. He said before the announcement that “there’s enough capacity left in the existing program to carry them at least one or probably two FOMC meetings, so in the event that they decide they want to expand those programs, they can do so when they have more information.”
The next two meetings are scheduled for Aug. 11-12 and Sept. 22-23. If the Fed steps up its purchases of mortgages or Treasuries, it doesn’t have to do so in a rate policy statement; it has the flexibility to make that announcement at any time.
Alan Rosenbaum, president of Guardhill Financial, a New York-based mortgage lender, had hoped the Fed would decide to step up its purchases of mortgage-backed securities, which would have the effect of causing rates to go down again and luring refinancers back into mortgage offices. It didn’t happen.
“I don’t think it will hurt the market if they do not say they will be buying more than they announced previously,” he said. But, he implied, it might have helped.
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