There's still time to take advantage of today's historically low
The Federal Reserve pledged again Wednesday that it won't raise
federal funds rate
target -- which helps set other interest rates -- until the
unemployment rate falls below 6.5 percent. (The unemployment rate
is currently stuck at 7.8 percent.)
"Information received since the Federal Open Market Committee
met in December suggests that growth in economic activity paused in
recent months, in large part because of weather-related disruptions
and other transitory factors," said the Fed in a post-meeting
. "Employment has continued to expand at a moderate pace but the
unemployment rate remains elevated. Household spending and business
fixed investment advanced, and the housing sector has shown further
In light of the improving but still weak economic data and
relatively stable outlook for inflation, members of the Federal
Open Market Committee (FOMC) voted to leave the federal funds rate
target -- which helps set the rate at which banks trade Federal
Reserve Bank balances -- at 0 percent to 0.25 percent.
The same day the Federal Reserve announced that it is leaving
its interest rate policy alone, for now, the Commerce Department
gross domestic product (GDP)
in the U.S. contracted toward the end of 2012 for the first time
since 2009. The negative growth was largely due to substantial
cutbacks in defense spending and fewer investments in inventory
made by businesses, said the Commerce Department.
The dual reports underscore the enduring weakness of the U.S.
economy, which experts say has captured the Fed's attention to such
a degree that the Fed is trying to use nearly every power it has to
help the economy recover.
"They're doing all they can," says Don Dutkowsky, a professor of
economics at the Maxwell School of Citizenship and Public Affairs
at Syracuse University. "They're not overly worried about inflation
at this point and they're trying to get this slow growing economy
back to a complete state of health."
What it means for borrowers
As a result, interest rates on everything from home loans to credit
cards are going to remain at record lows for some time.
Most credit cards in the United States, for example, are tied to
the U.S. prime rate, which is typically 3 percentage points above
the federal funds rate. When the
Federal Open Market Committee (FOMC)
votes to raise or lower the federal funds rate target, the
U.S. prime rate
moves up or down as well.
The Federal Reserve hopes that by keeping interest rates at
historic lows, businesses and consumers will take advantage and
borrow more than they otherwise would.
The policy's success, however, has been mixed, say experts.
Consumer spending and business spending have both picked up
somewhat in the past year. So have the housing and auto markets.
However, growth remains slow -- and often unsteady -- and is not
yet strong enough to push the U.S. toward the robust recovery the
Fed is aiming for.
"The economy needs more spending," says Dutkowsky. "But
it's a lot to expect of businesses to undertake the burst of
economy activity," that the economy needs to reach a substantially
lower unemployment rate.
Many consumers and small businesses are also facing a
historically tight credit market that makes it tough for many
people to take advantage of the low-rate loans that are available
to some, even if they wanted to, says Rebel Cole, a professor of
finance at DePaul University.
"Banks simply aren't lending, except to the most creditworthy
customers," says Cole. Some banks have eased their underwriting
standards somewhat in the past year, according to
Federal Reserve data
. However, most have reported to the Fed that they are making few,
if any, changes to the tight credit standards they implemented
during the recession.
"It has a huge impact," says Cole. "If firms can't borrow, they
can't expand. If they can't expand, they can't hire. Until the
banks start lending, you can't jump-start the labor market."
At the same time, many consumers are being hampered by the
tighter credit standards and aren't able to make the big ticket
purchases they'd otherwise make if they had access to the record
low rates that are being offered to people with pristine credit,
"What you sort of have is this catch-22," he says. "Until
consumers start buying, businesses won't expand." But often what
happens is, "consumers aren't buying because banks aren't
Experts expect more of the same
Despite the structural roadblocks that are making it difficult for
the Fed's policies to work as well as the committee hopes, experts
say that the Fed is unlikely to give up anytime soon. Experts
predict that the Fed will continue focusing on trying to lower the
unemployment rate as long as inflation remains stable.
"The Bernanke Fed has clearly been aggressive in terms of trying
to expand this economy and get it to recovery and they continue to
be so," says Syracuse University's Dutkowsky. Absent any wild card,
such as unusually higher prices, the Fed is likely to stay the
course until the unemployment rate hits the Fed's target number, he
That, in turn, could take some time, say experts. The
unemployment rate "has been distorted by people giving up and
leaving the labor force," says DePaul University's Cole. "The labor
market really hasn't improved much at all since the worst of the
financial recession and that's really why the Fed has been
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