Fed to leave rates “near zero” until 2013

There was no mention of a third round of quantitative easing, but the Federal Open Market Committee has announced it will leave interest rates near zero until at least mid-2013.

The Federal Reserve has held rates at just 25 basis points since December 2008. Until today, the Fed had said it would keep it low for “an extended period.”

The more explicit time frame is aimed at calming nervous investors, giving them a clearer picture of how long they will be able to obtain ultra-cheap credit.

“Economic growth so far this year has been considerably slower than the committee had expected,” the Fed admitted in its press release, predicting a “somewhat slower pace of recovery over coming quarters.”

The shift in language was as mild a form of stimulus as the Fed could provide. There had been some hope in the market that a third round of quantitative easing would be launched.

“There had been rumours that they would do something beyond the earlier pledge to keep rates low for ‘an extended period’—after all, [Ben] Bernanke had indicated that ‘extended’ only meant two or three months,” said Peter Buchanan, senior economist at CIBC World Markets.

“The market is a bit disappointed, as some people had thought that they might leap straight ahead with another round of quantitative easing, and they decided not to do that,” he said.

“The economic wording was a good deal more cautious than in the previous statement,” he said. “They noted that while growth has moderated, only part of that slowdown is due to transitory factors. The subtext is that the Fed is more worried about the outlook than it was a month or two ago.”

“But there weren’t the sort of hints there that some people were hoping for, so that’s why we’ve had the pullback in equities as well as in the price of oil and other commodities,” Buchanan said.

In Canada, he said the Bank of Canada will likely leave its key policy rate at 1% until early 2012.

“The Fed’s conditional commitment is not that dissimilar to what the Bank of Canada said a year or so ago,” Buchanan said. “I think the Bank is under reduced pressure [to raise rates], as a result of the market turmoil. This would certainly nudge it further in that direction.”

Staff

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