Fed keeps interest rates at record low

Fed keeps interest rates at record low

The most important thing to understand about the Federal Reserve’s decision Wednesday is that it has decided to keep the monetary policy dial set to “stimulate.”

In a statement ending a policy meeting, the Fed suggested that the job market, though still not back to normal, is strengthening. The statement drops a previous reference to “significant” in referring to an “underutilization” of available workers.

The U.S. economy has been benefiting from solid consumer and business spending, manufacturing growth and a surge in hiring that’s reduced the unemployment rate to a six-year low of 5.9 percent. Still, the housing industry is still struggling, and global weakness poses a potential threat to U.S. growth.

Fed Chair Janet Yellen has stressed that while the unemployment rate is close to a historically normal level, other gauges of the job market remain a concern. These include stagnant pay; many part-time workers who can’t find full-time jobs; and a historically high number of people who have given up looking for a job and are no longer counted as unemployed.

What’s more, inflation remains so low it isn’t even reaching the Fed’s long-term target rate of 2 percent. When inflation is excessively low, people sometimes delay purchases — a trend that slows consumer spending, the economy’s main fuel. The low short-term rates the Fed has engineered are intended, in part, to lift inflation.

Investors are expected to remain on high alert for the first hint that rates are set to move higher. Most economists have said they think the Fed will start raising rates by mid-2015. But global economic weakness, market turmoil and falling inflation forecasts have led some to suggest that the Fed might now wait longer.

The Fed’s decision to end its third round of bond buying had been expected. It has gradually pared the purchases from $85 billion in Treasury and mortgage bonds each month to $15 billion. And the Fed had said it would likely end the program after its October meeting if the economy continued to improve.

Even with the end of new purchases, the Fed’s investment holdings stand at $4.5 trillion — more than $3 trillion higher than when the bond purchases were launched in 2008 at the height of the financial crisis. The Fed has said it won’t begin selling its holdings until after it starts raising short-term rates.

Most economists have predicted that the Fed’s first rate hike won’t occur until next summer. Some foresee no increase until fall, in part because of fears that the global economy is weakening and could threaten the U.S. economy.

The bond buying program the Fed is now ending was intended to lower long-term borrowing rates to encourage spending and spur economic growth. The Fed began the purchases after it had cut its main policy tool, the federal funds rate, as low as it could go. The Fed’s benchmark short-term rate has been at zero since December 2008.

Supporters have said the bond buying helped invigorate the economy and reduce the unemployment rate, which peaked at 10 percent during 2009, to the current 5.9 percent.

Critics contend that the Fed will find it hard to sell its massive holdings without jolting financial markets. They also worry that all the money it has pumped into the economy will eventually ignite inflation and cause dangerous bubbles in assets like stocks or housing.