A return to a rising interest rate environment remains a long
way off, the Federal Open Market Committee signaled in its
June meeting announcement
The committee voted to hold interest rates at their ultra-low
levels to continue to spur the economy -- while it noted that
conditions are gradually improving -- and reaffirmed plans to
continue buying bonds to hold long-term rates down.
The rate-setting committee of the Federal Reserve System said
that since its
last statement May 1
, information "suggests that economic activity has been expanding
at a moderate pace," using language close to previous
"At 7.6 percent, the unemployment rate remains elevated, as do
rates of under-employment and long term unemployment," Federal
Reserve Chairman Benjamin Bernanke said during a press conference
following the release of the meeting statement.
In addition to announcing its summary of the two-day FOMC
meeting, the Fed released
quarterly economic projections
showing the committee is somewhat more optimistic about economic
growth next year, raising its projection to a range of 3.0 percent
to 3.5 percent GDP growth, from 2.9 percent to 3.4 percent in the
previous projection. Most committee members expect to hold off on
rate increases until sometime in 2015.
The FOMC controls short-term rates by setting targets for the
federal funds rate -- the rate at which banks make overnight loans
to each other to meet reserve requirements. As expected, the
committee voted to leave the federal funds target at its range of 0
percent to 0.25 percent. The key rate is linked to the prime rate,
the benchmark that most credit card agreements use to adjust the
variable rates that cardholders pay.
The Fed is also buying Treasury securities and mortgage-backed
securities in a program designed to help keep long-term interest
rates low, providing a lift for the housing sector. The Fed is
expected to pull back gradually from bond-buying -- a process that
could take roughly a year, economists say -- before it would
increase interest rates. However, the announcement reaffirmed plans
to continue purchases at the current pace of $85 billion per month.
Bernanke said the committee expects that purchases will begin to
taper off late in 2013, and may come to an end about the time
unemployment reaches 7.0 percent.
"The decision the Fed has to make on tapering is still a
question of timing -- you can't keep buying $85 billion of bonds
indefinitely," said Mark Vitner, senior economist for Wells Fargo.
If not for belt-tightening by federal and state governments, the
economy would be growing at about a 2.5 percent to 3 percent pace,
In the weeks leading up to the meeting, rates on long-term bonds
have moved upward on speculation that the Fed is preparing to trim
its securities purchases later in 2013. The FOMC's announced goals
for the economy are to reduce the jobless rate to about 6.5
percent, as long as long-term inflation is tame. The target for
inflation is set at 2 percent, with a 2.5 percent rate as the point
for reversing course and hiking interest rates. Bernanke said the
figures are thresholds, not triggers.
released by the government on Tuesday showed plenty of room for the
Fed to continue with its easy-money policies. The Consumer Price
Index was up 1.4 percent over the 12 month period that ended in
May. Analysts characterized inflation pressure as modest, as the
monthly price index showed a seasonally adjusted increase of 0.1
The housing market showed continued strength as well, with
rising 6.8 percent in May on a seasonally adjusted basis, the
National Association of Home Builders said in an announcement
Tuesday. The rise would probably have been stronger if not for
especially rainy conditions, which dampened single-family home
But in the job market, gains continue to be slow in coming. In
edged up 0.1 point to 7.6 percent, as job seekers coming into the
labor market outpaced hiring by employers. The members of the
committee voted in favor of the statement by 10 to 2.
Some economists see the Fed as becoming increasingly boxed in.
Although job creation remains slow, the bond market has been going
through gyrations because of speculation that bond purchases will
dry up. As the Fed's easing policy continues, the task of weaning
the economy off the stimulus measures will become harder.
"I think it's right to begin to move the focus to when we would
begin" to cut back on securities purchases, Vitner said. "But there
are still enough reasons to keep them in place right now." In
addition to soft job creation, global economic pressures also argue
in favor of continued stimulus, he said, citing recent unrest in
Turkey and Brazil. The demonstrations "are really rooted in
struggles that wage earners are facing today," he said.
Bernanke declined to comment on heightened speculation about his
continued tenure in the job. In an interview Monday, President
Barack Obama said that Bernanke has already remained in the post
longer than expected. Former Fed Governor Laurence Meyer said the
remarks amounted to a dismissal, while other observers interpreted
the comment as signaling that Bernanke will depart at the end of
his term in early 2014. Bernanke was appointed in 2006 by
then-President George W. Bush.
Janet Yellen, appointed the Fed vice-chair by Obama in 2010, is
viewed as the most likely replacement. Questions about Yellen's
ability to handle the public aspects of the chairmanship lead many
to believe that Lawrence Summers, the former Harvard president and
former head of the National Economic Council during Obama's first
term, might also be a candidate. A dark horse in the field is
Christina Romer, a former chair of the Council of Economic
Advisers, who is seen as favoring more aggressive stimulus
CreditCards.com reporter Kristie Aronow contributed to this