Federal Reserve Staying the Course Holding Down Interest Rates
The Federal Open Market Committee held their two day meeting this week on economy policy. Right after the meeting the FOMC released and statement and the Federal Reserve Chairman, Ben Bernanke, held a press conference, you can read the transcript here: Fed transcript. As expected the Fed continues to stay the course of goosing the economy by keeping the Federal Funds rate near zero percent. Unfortunately, this will keep CD rates and other deposit rates low for the foreseeable future.
The Fed is also going to continue buying $40 billion a month in mortgage-backed securities (MBS) and $45 billion a month in long term U.S. Treasuries. This is somewhat of a surprise because all the recent positive economic data that has been released. The Fed wasn't expected to increase the Fed funds rate but some analysts believed they Fed would announce a slowing down of asset purchases or announcing end date to the purchases.
The Fed's outlook on the economy is a little rosier than has been in the past. The Fed Chairman, Ben Bernanke, said the following in the press conference:
Spending by households and businesses has continued to expand, and the housing sector has seen further gains. The jobs market has also shown signs of improvement over the past six months or so: Private payrolls are growing more quickly, total hours of work have increased, the rate of filings of new claims for unemployment insurance has fallen, and the unemployment rate has continued to tick down.
The economy is improving but not fast enough for the Fed to make changes in policy. The Chairman also said the Fed is still worried about a number of issues, including "restrictive fiscal policies may slow economic growth and job creation in coming months," Fed speak for the federal government cutbacks and deficit reduction. The Fed is also still concerned that the unemployment rate at 7.7 percent is still "elevated."
On the other hand inflation still isn't a concern for the Fed saying "inflation is running somewhat below the Committee’s longer-run objective of 2 percent". These concerns along with low inflation is allowing the Fed to keep accommodating economic policies that will foster growth and lower the unemployment rate.
As for as projections economic outlook the Fed governors overall believe the economy will grow between 2.3 to 2.8 percent for 2013, rising to 2.9 to 3.7 percent in 2015. Projections for the unemployment rate for the fourth quarter of this year is 7.3 to 7.5 percent, declining to 6.0 to 6.5 percent in the final quarter of 2015. A majority of governors project inflation to run between 1.3 to 1.7 percent this year and 1.7 to 2.0 percent in 2015.
If these projections turn out to be correct average bank CD rates will increase from current levels but not back to the rates we saw just before the financial crisis. Right now the best CD rates on 12 month certificates of deposit are at 1.04 percent. By the end of 2015 1 year CD rates could move into the 2 percent range to 3 percent range.
You can view the Fed Chairman's entire press conference in the video below:
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