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Fed Now Keeping Near-Zero Rates Through Late-2014... QE4?
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This was definitely going to be a different sort of FOMC day with the way that the new communications are going to show more of the inner-thinking of the Federal Reserve on rates and monetary policy. What was of no surprise is that the FOMC decided to keep rates on Fed Funds flat at 0.00% to 0.25%.
What was new and unexpected was the comments on how long exceptionally low interest rates will remain in place. Rather than through mid-2013, the FOMC now has language that will accommodate that near-zero rate stance at least through late 2014. If that is not a dovish Fed, there never has been one.
Everyone has been wondering if quantitative easing would expand via QE3 (or QE2.5)… Let’s just be honest. This is more like QE4.
Fed governor Lacker sought to leave out the expected time period for the incredibly low interest rate horizon. The Fed will also regularly review the size and the composition of its holdings and it is currently maintaining the plan to reinvest mortgage debt principal payments.
The Fed will also continue expanding the maturity of securities, which was that “operation twist” that has been in effect.
The wording was that global financial markets still pose significant risks and the unemployment rate is likely to decline only gradually with a modest pace of economic growth in the coming quarters. Inflation is subdued and expectations remain stable for inflation.
Other notes: Housing remains depressed, business investing has slowed, household spending continues to improve.
The Fed left the Discount Rate flat at 0.75% and the vote was 9-1 for the Fed Funds Rate action with the sole dissenter being Lacker.
JON C. OGG
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