Fed Extends Record-Low Interest Rates Through Late 2014
The Federal Reserve announced on Wednesday that it will not increase its benchmark interest rate until at least late 2014, saying that record-low rates are still needed to help boots the still sluggish economy.
After a two-day meeting of the Federal Open Market Committee, the central bank said the economy is growing moderately, despite slowing global growth.
The Fed described inflation as “subdued” — a more encouraging description than offered last month. A better outlook for prices will allow the Fed more room to keep rates low.
Treasury yields fell on the news, while stocks quickly recovered their morning losses. Lower yields could further help reduce mortgage rates, which are tied to Treasuries, as well as boost stock prices as investors shift out of lower-yield government bonds.
Economists believe the extended time frame for low rates could lead to further Fed action to try to stimulate the economy, but today the Fed held off on any further bond-buying programs to fuel growth.
Other than pledging to keep its key rate at a record low well beyond the earlier mid-2013 target, the central bank’s statement today closely tracked its previous comments about economic conditions, using the same language to describe Europe’s debt problems and their impact on the global economy.
U.S. companies are hiring, the stock market is rising, the housing market is improving, factories are busy and more people are buying cars, but the threat of a recession in Europe will likely continue to drag on the global economy, the United States included.
The Fed said it would continue a program to further drive down long-term rates by selling shorter-term securities and buying longer-term bonds, but officials have resisted further bond buying for fear it would raise the risk of high inflation later.
In two rounds of bond buying, the Fed purchased $2 trillion in government bonds and mortgage-backed securities to try to cut long-term rates and ease borrowing costs so as to encourage consumers and businesses to borrow and spend more. Lower yields on bonds also encourage investors to shift money into stocks.
While Fed officials have chosen not to continue bond purchases at this time, they did not rule out the possibility of another bond buying program in the future, saying they were prepared to adjust their “holdings as appropriate to promote a stronger economic recovery in the context of price stability.”
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