Home / News / Government / Market Conditions Make for Even Longer ‘Extended Period’ in Fed’s Eyes
Print This Post Print This Post

Market Conditions Make for Even Longer ‘Extended Period’ in Fed’s Eyes

The ""Federal Reserve"":http://www.federalreserve.gov put a conditional timestamp on its interest rate policy Tuesday â€" a different voice from the ""extended period"" mantra heard from the U.S. central bank for the past two-and-a-half years when it spoke of expectations for keeping its benchmark interest rate near zero.

[IMAGE]

The Federal Reserve board again voted to hold the target range for the federal funds rate â€" the rate at which banks lend to one another â€" at 0 to 0.25 percent, but this time they included an advisory notice that the rate would remain at this level for the next two years.

The Fed ""currently anticipates that economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013,"" the central bank's board said in ""its policy statement"":http://www.federalreserve.gov/newsevents/press/monetary/20110809a.htm.

Up until now, the Fed board had only said it ""continues to anticipate that economic conditions…are likely to warrant exceptionally low levels for the federal funds rate for an extended period.""

Analysts and investors have long lamented the Federal Reserve's ambiguity in setting expectations for raising the benchmark rate. Its decision to do so now could be a reflection of the volatility emerging in financial markets, with stock values tumbling in recent days, Standard & Poor's rating downgrade for U.S. debt, and investors'

[COLUMN_BREAK]

unexpected response to the S&P's move with a rush on government-backed Treasury bonds.

""The purpose to the time scale is to anchor expectations of future short-term rates at very low levels, pressing longer-term interest rates down,"" said Nigel Gault, chief U.S. economist for ""IHS Global Insight"":http://www.ihsglobalinsight.com.

Gault noted that 10-year Treasury yields dived towards 2 percent after the Fed's announcement, hitting their lowest point ever and foreshadowing extremely low interest rates for mortgage borrowers and other credit applicants.

Three representatives of the 10-member Fed board voted against setting an ‘at least two years out' date for the interest rate increase. Richard Fisher, Narayana Kocherlakota, and Charles Plosser cast the dissenting votes, preferring to continue to describe economic conditions warranting a low federal funds rate for ""an extended period.""

Paul Dales, a senior economist with ""Capital Economics"":http://www.capitaleconomics.com explained that the customary “extended period” language was thought to mean around three months, so the Fed has now lengthened its low rate guidance by roughly 20 months.

Dales says perhaps more significant is the central bank’s statement that its board “discussed the range of policy tools available to promote a stronger economic recovery"" and signaled it is ""prepared to employ these tools as appropriate."" According to Dales, that indicates a QE3 plan â€" or third round of ‘quantitative easing’ â€" may be in the works.

The second round of stimulus â€" or QE2 â€" entailed a $600 billion Treasury bond-buying spree by the central bank; the first round came in the form of the purchase of $1.25 trillion in mortgage-backed securities and GSE debt.

According to the Federal Reserve, economic growth this year has been “considerably slower” than it had expected. The unemployment rate has risen, household spending has flattened out, and the housing sector can’t seem to claw back from its depressed state â€" all factors that are dampening the economic outlook, the central bank says.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
x

Check Also

HUD Grants $150M to Tribal Communities for New, Affordable Housing

“Strong investments in Tribal communities help ensure residents can access much-needed safe and affordable housing,” said Secretary Marcia L. Fudge. “The funds HUD is making available will meet the challenges of today and allow Tribal communities to make innovative and vital advancements needed to prepare for the future."