The Fed sees improving economy but keeps rates low
Filed under: Economy
The economy is showing signs of improvement, the Federal Reserve said Wednesday. But that doesn't mean an interest rate hike is around the corner. The Fed said it would keep its benchmark rate "exceptionally low" for an "extended period of time.""Economic activity has picked up following its severe downturn," it said in a statement after its rate-setting Federal Open Market Committe meeting concluded on Wednesday. "Conditions in financial markets have improved further, and activity in the housing sector has increased." But challenges, including rising unemployment, tight credit and falling business investment haven't disappeared, and could stand in the way of a recovery, the Fed said.
Of course, it's hardly a surprise that rates will remain low, even if the language is striking. The Fed cut its key rate to zero-to-one-quarter percent late last year and has kept it there all year. And there's little chance the Fed will reverse course anytime soon. As this chart shows, rates usually don't start climbing again until some time after unemployment has peaked, and few economists expect that to happen quickly.
More interesting was the Fed's move to extend one of its hugely expensive programs to inject cash into the economy.
To jump-start lending, the Fed earlier this year announced a plan to buy $1.25 trillion in mortgage-backed securities and $200 billion in other debt issued by Fannie Mae (FNM) and Freddie Mac (FRE). Those purchases were supposed to stop at the end of this year. Instead, they'll be slowly phased out by the end of the first quarter of 2010, according to the Fed.
Fed watchers have been waiting for the central bank to say something different. That made last month's meeting more interesting than usual, when it said that its plan to inject $300 billion into the economy by buying U.S. Treasury bonds would be phased out this fall. That move foreshadowed today's announcement about purchases of Fannie and Freddie debt.
The markets got another taste on Tuesday of what could come next when Bloomberg News reported that "reverse repo" agreements could be in the works. Such deals would entail the Fed selling some of the securities it owns to investment firms to remove cash from the economy.
After each of the FOMC's five previous meetings this year, its members have said they're carefully monitoring the effects of their "quantitative easing," as those liquidity-boosting measures are called. That consistency has taken much of the drama out of its meetings. But it doesn't mean they're not closely watched.
As always, even small changes to the language the Fed uses when it announces its decisions are fodder for investors' and economists' scrutiny.
For example, the Fed said in Wednesday's release that it "will continue to employ a wide range of tools to promote economic recovery and to preserve price stability." In contrast, after previous meetings this year, it said it would "employ all available tools." Setting a deadline for phasing out its debt purchases apparently puts at least one tool back in the box for now.
More interesting was the Fed's move to extend one of its hugely expensive programs to inject cash into the economy.
To jump-start lending, the Fed earlier this year announced a plan to buy $1.25 trillion in mortgage-backed securities and $200 billion in other debt issued by Fannie Mae (FNM) and Freddie Mac (FRE). Those purchases were supposed to stop at the end of this year. Instead, they'll be slowly phased out by the end of the first quarter of 2010, according to the Fed.
Fed watchers have been waiting for the central bank to say something different. That made last month's meeting more interesting than usual, when it said that its plan to inject $300 billion into the economy by buying U.S. Treasury bonds would be phased out this fall. That move foreshadowed today's announcement about purchases of Fannie and Freddie debt.
The markets got another taste on Tuesday of what could come next when Bloomberg News reported that "reverse repo" agreements could be in the works. Such deals would entail the Fed selling some of the securities it owns to investment firms to remove cash from the economy.
After each of the FOMC's five previous meetings this year, its members have said they're carefully monitoring the effects of their "quantitative easing," as those liquidity-boosting measures are called. That consistency has taken much of the drama out of its meetings. But it doesn't mean they're not closely watched.
As always, even small changes to the language the Fed uses when it announces its decisions are fodder for investors' and economists' scrutiny.
For example, the Fed said in Wednesday's release that it "will continue to employ a wide range of tools to promote economic recovery and to preserve price stability." In contrast, after previous meetings this year, it said it would "employ all available tools." Setting a deadline for phasing out its debt purchases apparently puts at least one tool back in the box for now.
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Reader Comments (Page 1 of 1)
9-23-2009 @ 5:37PM
jack said...
They are trying to stimulate the economy? This really means nothing, with banks not loaning money. You could set the rate at -98%, and this will not help. Banks are refusing to loan the stimulus, just buy the banks, that received not bailout.
Washington needs to go, of the people, by the people, for the people.
We have the best Government that money can buy.
Reply
9-23-2009 @ 6:50PM
Gordy said...
NOT improving! Feds just want us to believe that so that we drive the stock prices up one last time so the big investors can pull out real quick. End of Q3, G-20 in Pitt, (Black)October will suck!
Reply
9-23-2009 @ 6:58PM
andy said...
the fed works for obama. they want to keep stock prices up so it appears we are doing better and pass the health care rip off. i went on the internet and canada did not have the bank problem we had.go on the internet to other countries and read what they say about the united states and our finances.we have been robbed.
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9-23-2009 @ 7:24PM
sniphair@aol.com said...
What a joke keeping interest a 0% overnight rate & 3% Prime Rate. It's doing absolutely nothing for the consumer or the ecomony it's only helping the Banks & Credit Card Companys. & killing the retired people living on fixed incomes. Money that they worked all there lives for & have to live on 1 to 2% cd's & treasurys. What a joke.
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9-24-2009 @ 9:21AM
engineerex said...
Couldn't agree more. Since the Fed set the rate at between 0 and 1/4% my bank has dropped their interest rate from 2% to 1.85% to 1.75% on Cd's. Now they're at 1.60% and they make you feel like they're doing you a favor by giving you that rate. Meanwhile they're lending money at between 5 and 6%. Seems like the only people not getting anything from the stimulus is people who did what they were supposed to do, you know pay their mortgages, credit cards etc on time.
9-23-2009 @ 7:51PM
PerryLong said...
The Fed loans at almost 0% to banks... We get it at 5+ %
Give it to us cheap..
We can refinance and survvie..
Thats why the BANKS are paying back so quick..
Come on....
The Middle Class always PAY ...
RIGHT.................................
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9-23-2009 @ 9:16PM
teltech543 said...
I like the part where the government says everything is going well. Start spending money. The recession is over. Yada Yada Yada. Then the FED leaves the rate alone. So who are you to believe? If everything is hunky dorie, then raise it a quarter point. We need to raise money so our taxes don't skyrocket next year to pay for the bailouts. Personally I wouldn't believe the government if they told me the sky was blue. I would first want to check more reliable sources.
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9-23-2009 @ 11:31PM
Carol said...
It,s sad that interest rates are so low, Seniors can,t live on their retirement money. Going from 4% to 2%. If they really wanted to save the economy. They would raise rates, To help the Seniors, Our Government is buying large amounts of Treasury Bonds, and Notes. Makes me wonder if China, and Japan are still buying United States Debt. What happens if these Countries start selling our Bonds and Treasury Notes? The Feds will have to raise rates to attract buyers to our Debt.< I wonder if that could really happen>
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9-23-2009 @ 11:41PM
Davey Rockeyfeller said...
When will the American people stand up and put an end to the gangsters? Probably never but that's all these ghouls are and you can always tell a gangster because the are cowards hiding behind goons with guns. I saw this at the RNC convention when they spent 50 million on imported cops, military, Israelis, gases, projectile weapons, helicopters, gunboats, etc. These idiots looked like Terminators not cops. Idiots, and Goldman Sachs and David Rockefeller have loads of them because they are criminals as all banksters are now. I mean they just shot it out with each other then the survivors looted the world for trillions then force Congress to hand over the US Treasury? Where's the sheriff? We've been robbed!!! Well I've got news for them, what they'vedone shows how desperate they are and the corner they have locked themselves into but it will crash down at some point and the goons will not work without their money and they will be alone and busted. Anyway criminals usually do themselves in. Their lies and BS won't help do anything but delay the crash and folks it's going to crash. Jobs are still being lost, people are getting crazy and desperate, the BS is getting deeper, the the disconnect from Washington is hitting a new high again. Charts tell the truth, the Dry Baltic Freight Index is now heading down again the "green shoots" went to China like the oil in Iraq, credit is getting tighter, not opening up, commercial real estate is next, stocks will drop soon and the banksters will flee to remote locations hiding behind guns. The fun is just getting started! Gold, silver, gardens, network with folks who aren't brain dead, guns, ammo, high quality liquor, a good dog, and dry food, canned goods, good music, good books, and hunker down.
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9-24-2009 @ 12:15AM
TEVA said...
It may seem like a good move on the surface but the feds need to push up rates to help people banking money.
The banks have a lot of cash right now because of a influx of money from the feds but more important is that people are saving money because they don't trust the markets
so there cash is sitting in bank accounts making no money if fact they are loseing ground to inflation.
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9-24-2009 @ 8:38AM
refuse2lose said...
I wonder if you took a poll of 10,000 Americans how many would tell you the economy has recovered.The only thing that has recovered is the dill holes that caused our problems in the first place.And now they want to sit on trillions of our dollars?Communist China,even with all their faults made sure that their banks knew they were to loan out the money that was given them.What did Obama do?He gave away trillions with no restrictions attached.Any restrictions would be put on the NEXT bailout if necessary.People are loading up on weapons when they should be loading up on vaseline,were being raped.
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9-24-2009 @ 8:34AM
mornewz said...
new ouija board for bailout ben?
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