Coming soon after the Congressional effort to lift the debt ceiling, the S&P downgrade of the credit rating of the Federal government, and elevated volatility for stock market prices, the Federal Reserve’s Open Market Committee (FOMC) today reported a long-term commitment to low interest rates during its August 2011 meeting.
The FOMC stated:
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee 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 establishment of a guaranteed duration, and one reaching beyond 2012, is both new and an apparent source of division on the FOMC, with an unusually high three members dissenting from the FOMC announcement. This is the highest dissent rate for almost 20 years.
While studying other policy tools, the Fed offered no new monetary policies, such as a hypothetical QE3, but continued to indicate that the some effects from QE2 would continue via the reinvestment of principal paid on securities held by the central bank.
The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
In describing the state of economic conditions, the Fed noted continued labor market weakness and a depressed housing market:
Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.
For housing, the Fed’s explicit commitment to maintain low short-term interest rates through at least mid-2013, coupled with bond market activity in a period with multiple downside risks, set the stage for an overall lower yield curve. This interest rate environment is consistent with NAHB’s forecast of low mortgage interest rates over the next two years. Low rates should help support housing demand as it emerges with a healing labor market, provided fiscal and regulatory policies do not prevent large numbers of potential homebuyers from qualifying for mortgages. However, recent low interest rates have not helped lending to small businesses, which is holding back employment growth.