Fed extends “free money” policy

Remember when the U.S. Federal Reserve set the market ablaze with the forecast that it would not to raise rates before mid-2013? Well, now the Fed is extending that outlook a little further, to “late 2014”.

In a press release detailing the latest meeting of the Federal Open Market Committee, the Fed pointed to the sluggish U.S. economy as justification for protracting the era of “free money”.

“The Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and 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 late 2014.”

While the U.S. economy has managed moderate expansion, high unemployment remains a concern, as is slower business investment. The stumbling global economy appears to be controlling inflation, and the Fed clearly feels rates can remain in the cellar for a considerable period.

“The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate [of fostering maximum employment and price stability],” the Fed statement says.

The central bank also announced that it would extend the maturity on its bond holdings, rolling principal payments over into new investments in mortgage-backed securities and maturing Treasury bonds.

The Committee expects interest rate will eventually rise to 4.5%, which will help maintain its target rate for inflation of 2%.

“Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum employment in the face of significant economic disturbances,” the Fed said.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.