www.CUNA.org/newsnow (09/22/10) Federal Reserve policymakers said that they would keep the target range for the federal funds rate at 0% to 0.25% "for an extended period," and maintain its policy of reinvesting principal payments from securities holdings.
"The Federal Reserve's [policymakers'] statement indicated their concern about the slow pace of the economic recovery and its sustainability," said Steve Rick, Credit Union National Association (CUNA
) senior economist. "Recent economic indicators point to second-half growth below the long-term potential, which will not be enough to absorb new entrants into the labor force. This could result in a rise in the unemployment rate for the rest of the year," he told News Now
"Fed officials raised concerns regarding the slow pace of household spending, which makes up 70% of the economy. One of the major factors reducing debt-laden households' cash flows is their unwillingness or inability to borrow," Rick said. He went on to say that households could continue cost-cutting measures to reduce debt for the next few years.
"To keep the economic recovery on track, the Fed reiterated its policy of reinvesting principal payments from its securities holdings to keep long-term Treasury interest rates low. If economic growth drops any lower, we could see the Fed boost its quantitative easing (buying bonds with newly printed money) to further flatten the yield curve," Rick continued.
Rick concluded that with inflation continuing to trend down, and worries about the possibility of a deflationary downward spiral, the Fed will not raise the fed funds interest rate for an "extended period".
Translation? Don't expect the rate to increase until at least the spring of 2012.
In addition to keeping the fed funds rate steady, the committee said it "continues to anticipate that economic conditions... are likely to warrant exceptionally low levels for the federal funds rate for an extended period."
The Federal Open Market Committee (FOMC) "will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate".
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