Fed Funds Rate to Remain Very Low for "Extended Period"
WASHINGTON (06/22/11) The Federal Reserve's policymakers decided to keep the fed funds target rate steady at 0 to 0.25% to promote the ongoing economic recovery and to help ensure that inflation -- over time -- is at levels consistent with its mandate.
"With this announcement, we are not likely to see the first increase in the fed funds rate until the middle of next year," said Bill Hampel, chief economist for the Credit Union National Association
(CUNA), regarding the statement issued by the Federal Open Market Committee (FOMC) at the conclusion of their meeting. "This means yields on investments will remain at their current extraordinarily low levels for another year."
Information received since the committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee had expected.
Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending, and supply chain disruptions associated with the tragic events in Japan.
In its FOMC policy statement, the Fed suggested that the recent slowdown in the economy is temporary, and that moderate growth is likely to resume in the second half of the year, Hampel told News Now. Because of concerns about lingering unemployment, the Fed announced that it will keep the Fed Funds rate at its current very low level "for an extended period." The statement has used this "extended period" language for almost two years, Hampel said.
► At the same time, the FOMC announced that it would end its program of "quantitative easing" at the end of the month, Hampel added. That program involved purchases by the Fed of long-term Treasury securities to keep long-term interest rates in check.
► Although the Fed still expects economic growth to resume in the second half, it slightly lowered its gross domestic product forecasts for the second half of 2011 and all of 2012, Hampel said.
► Household spending and business investment in equipment and software continue to expand, the Fed said. However, investment in non-residential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.
► The unemployment rate remains elevated; however, the committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the committee judges to be consistent with its dual mandate.
► Inflation has moved up recently, but the FOMC anticipates that inflation will subside to levels at or below those consistent with the committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the committee will continue to pay close attention to the evolution of inflation and inflation expectations.
Consistent with its statutory mandate, the Federal Open Market Committee (FOMC) will continue to monitor economic conditions and act as needed to foster maximum employment and price stability.
Return to Finance Updates