FOMC to keep rates low through mid-2013

Yesterday, the Federal Open Market Committee convened to decide on the Fed’s monetary policy and US interest rate. As expected the FOMC decided to keep the US interest rate unchanged at 0% to 0.25%.

In the meeting there were no hints or suggestions of another quantitative easing plan.

The FOMC also stated it anticipates keeping interest rates low at least throughout mid-2013.

The committee expects the US economy to have a slow paced recovery, the unemployment rate will decrease only gradually, but at least the US inflation rate is expected to settle as energy commodities prices have came down.

 The decline in the US inflation rate (see below) might have also contributed to this decision to keep US interest rates unchanged.

U.S. inflation JUNE 2011 Rate (percent) July 15 2011

 The FOMC didn’t elaborate on any future or current stimulus plans and only states it will continue with its policy of reinvesting principal payments from its securities holdings, but not to expand its balance sheet.

The recent quantitative easing plan (number 2) didn’t prove to have much of an effect on the US economy’s recovery and at best is served as a short term stimulus. After all how much a $600 billion injection to a $15 trillion economy could do? Not to mention that the businesses that are need of these funds are mainly the small and medium sized businesses; these funds, however didn’t reach these businesses. Therefore any future quantitative easing plan will need to undergo a significant change in order to be effective. Bernanke didn’t want to stir up the financial markets that were already extremely volatile so he only reassured the markets to keep rates low.

Here is the exact wording:

“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 recent markets’ reactions to S&P’s downgrade of US credit rating was very swift as major stock markets’ fell sharply while gold prices soared to new highs.

Following the FOMC meeting, the markets gained back some of the falls they had recorded on Monday and bounced back.



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Lior Cohen, M.A. commodities analyst and blogger at Trading NRG.