The U.S. Federal Reserve decided to maintain its current support
for low long-term interest rates, defying expectations that it
would take a step away from easy-money policies for the first time
The Fed's rate-setting committee voted to continue pumping money
into bonds at the current level of $85 billion a month. Most
analysts had predicted the amount would be shaved by $10
billion to $20 billion. The bond purchases are designed to keep
mortgage interest rates low by supplying cash for mortgage-backed
securities and Treasury bonds.
As expected, the Federal Open Market Committee also left
short-term rates that govern credit card APRs unchanged. To boost a
still-recovering economy, the committee voted to leave the
federal funds rate
target between 0 percent and 0.25 percent. The federal
funds rate is the benchmark used by banks in setting their
, which in turn set most credit card rates.
Federal Open Market Committee announcement
from the conclusion of its Sept. 17-18 meeting said bond purchases
would be maintained at the current level to await more evidence of
improvement in the underlying strength of the economy.
"Some indicators of labor market conditions have shown further
improvement in recent months, but the unemployment rate remains
elevated," the statement said.The announcement also cited recent
increases in mortgage rates and said "fiscal policy is restraining
economic growth," in a reference to federal across-the-board
spending cuts known as the sequester.
In its forecast of economic conditions, FOMC members took a more
pessimistic view of overall growth, predicting that GDP will rise
2.0 percent to 2.3 percent this year, about 0.3 percentage points
below their expectations at the last meeting in June.
The Fed reiterated
that it will hold the line on short-term rates until unemployment
drops to about 6.5 percent. The most recent jobless rate was 7.3
percent in August. During a press conference discussing the
decision, Fed Chairman Benjamin Bernanke said that the figure is
only a threshold, not a trigger.
"The first increases in short-term rates might not occur until
the unemployment rate is considerably below 6.5 percent," he
As the federal government approaches a showdown on its budget
and debt ceiling, Bernanke indirectly criticised restrictive
federal spending policies. Asked if the bond purchases are
effective, given the continued weakness in the job market, Bernanke
said that there have been improvements in jobs, and they have come
in the face of federal spending cuts projected to cost hundreds of
thousands of jobs. "There are a lot of things that monetary policy
can't address," he said. "We do what we can do, and if we get help
we're delighted to have help, from other policymakers and the
Short-term rates can't stay at historic lows forever. But there
are plenty of signs that they could last quite a while longer.
For one thing, inflation has been tame, giving policymakers
leeway for more monetary stimulus. The Department of Labor's
August 2013 inflation reading
extended the trend, with prices rising at an annual rate of 1.5
percent for August, below the Fed's target of 2 percent. It might
sound odd to have a target for price increases, but ultra-low
inflation is interpreted as a sign of excess slack in the
And former Treasury Secretary Lawrence Summers has bowed out of
consideration for the Fed chairman's job when Benjamin Bernanke's
current term ends in January 2014. Fed watchers said Summers was
likely to support higher rates, leaving the remaining candidates
more likely to keep rates lower, longer. Summers' exit leaves Vice
Chairwoman Janet Yellen the favorite for the top job, which is
filled by presidential appointment.
Some economists "are considerably more willing to err on the
side of sustaining a lower unemployment rate -- they'll give up a
little potential inflation," said Gregory Miller, chief economist
at SunTrust Bank. "There are folks on the other extreme who get out
of bed in the morning waging war on inflation."
Miller is one who thinks that the glide path to rate increases
could be shorter than the expected two-plus years. Unemployment
will fall to 6.5 percent by mid-2014 at its current pace of
improvement, he said. That's about a year ahead of the FOMC
members' majority view of when the federal funds rate should start
However, recent jobless numbers have been weak, kindling
speculation that the Fed could hold off further on boosting rates.
Some of the recent improvement in the
comes from people leaving the work force, as opposed to gains in
job creation. Some economists -- Miller among them -- say that the
shrinking labor force is part of a long-term trend in how families
choose to live. But others believe that at least some of the
departures are caused by discouraged workers giving up on the job
market -- and that calls for more stimulus, they argue.
Credit card APRs are linked to the prime rate, which is 3
percentage points higher than the federal funds rate. What's the
outlook for credit card APRs? Of 17 FOMC members and alternates,
all support leaving the federal funds rate at the current near-zero
level through the end of the year, and 14 support continuing the
policy through next year. In 2015, 14 members support a federal
funds rate of 1 percent, and three support higher rates.