Federal Reserve Expects to Keep Interest Rates Low Through Mid-2015

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Federal Reserve Expects to Keep Interest Rates Low Through Mid-2015
Federal Reserve Expects to Keep Interest Rates Low Through Mid-2015 (ABC News)

The Federal Reserve announced its highly-anticipated quantitative easing, or its so-called QE3, purchasing additional agency mortgage-backed securities at a pace of $40 billion per month in another effort to stimulate the struggling economy.

The Fed want to lower near-zero interest rates, citing an "elevated" unemployment rate and "strains in global financial markets."

The Fed said it was "concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions."

The Federal Reserve released its post-meeting policy statement at 12:30 P.M. eastern time after the Federal Open Market Committee (FOMC) completed its two-day meeting.

The committee also said it will extend the average maturity of its holdings of securities it announced in June through the end of the year.

In its statement, the Federal Reserve said it would keep the federal funds rate at zero to 1/4 percent at least through mid-2015.

The U.S. financial markets spiked after the statement was released. The Dow Jones Industrial average rose 0.81 percent to 13,441 while the S&P 500 was up 0.78 percent to 1,447 minutes after the announcement.

This is the fourth of five economic projections the committee makes a year. The next two-day meeting and projections will take place Dec. 11 and 12.

In previous announcements, the Federal Reserve had said it expected to keep short-term interest rates near zero until 2014.

"If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability," the central bank said in its statement.

Ahead of the Federal Reserve's announcement, government-sponsored Freddie Mac announced fixed mortgage rates held steady as the financial markets speculated there would be further stimulus.

The 30-year fixed-rate mortgage averaged 3.55 percent for the week ending Sept. 13, the same as the previous week. Last year at the same time, the 30-year rate averaged 4.09 percent.

The 15-year rate averaged 2.85 percent this week, down from 2.86 percent last week and 3.3 percent a year ago.

Francisco Torralba, economist in Morningstar's Investment Management division, called the Fed's communication strategy regarding near-zero interest rates a "double-edged sword."

He said a policy of "unconditional, semi-permanent zero interest rates can be self-defeating" if it negatively shapes the economic expectations of the public.

"Is the Fed announcing zero short-term rates 'forever' because they want to stimulate the economy, or because they expect a weak economy until 2014?" he asked. "If the Fed was expecting policy to improve things within the next couple of years, why would they commit to low rates? Does that mean that they don't expect low interest rates to work?"

The economic "hawks" within the FOMC have feared that large purchases of Treasuries and a commitment to low rates, would lead to higher inflation in the future, or to an unmooring of inflation expectations, he said.

"I do not agree with this position, but their opinion has not changed," he said.

Torralba did not expect a new program of Treasury purchases, or so-called quantitative easing.

"Employment and growth have deteriorated, but not to alarming levels, and inflation is not dangerously low—at least not yet," Torralba said. "Besides, in spite of Bernanke's defense of Treasury purchases at Jackson Hole, the level of confidence on this particular policy action within the FOMC has decreased."

On Aug. 31, chairman Ben Bernanke gave the keynote speech in Jackson Hole, Wyo. at the Federal Reserve of Kansas City's Economic Symposium, saying its policies "can be effective."

Torralba said the second round of Treasury purchases, first announced in Nov. 2010, expanded the monetary base but "did nothing to increase lending."

As a part of so-called QE2, the Fed reinvested in securities purchased during QE1 and purchased $600 billion in long-term Treasury securities.

Torralba said QE2 lowered long-term interest rates by less than the first round of quantitative easing, which began in late 2008, at the height of the financial crisis.

It was during the first round that the central bank purchased $500 billion in mortgage-backed securities and $100 billion in debt from Fannie Mae, Freddie Mac, and other housing organizations. The first round completed in the first quarter of 2010.

Though QE2 may have boosted asset prices, "this had a negligible effect on real economic spending," he said.

On Aug. 29, the Commerce Department reported the U.S. economy grew at 1.7 percent in the second quarter, a slowdown compared to the 2 percent growth rate in the first quarter.