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Fed Plans to Keep Low Interest Rates Through 2014

Sep. 5, 2012

Chart showing lower movement.Even though home inventory is going down and property prices are going up, the committee within the Federal Reserve System, known as the Federal Open Market Committee (FOMC), warns that's not enough. In a press release from August 1st, the committee cited the following reasons for maintaining low interest rates through 2014:

  • Economic growth remains slow, so keeping rates low will assist in fostering progress by improving employment and price stability.
  • The economy is expected to grow at a very gradual rate, which means the unemployment rate will also be improving at a slow rate. Having low interest rates will increase the buying power of those experiencing financial difficulties.
  • The prognosis for the global economy is also not overly favorable and is expected to affect the nation's economic outlook.
  • In an effort to accommodate the economic recovery, the committee has chosen to maintain the target rate of funds between 0% and 0.25%.

The release went on to state, "The committee also 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 late 2014."

This news affirms earlier announcements made by the Fed in June and its expansion of "Operation Twist". In an effort to get unemployed Americans back to work, the "Operation Twist" program in conjunction with the central bank, strives to extend the maturity of its holdings. It also uses principal payments from mortgage-backed securities and the principal payments from various holdings of agency debt, in order to buy more agency mortgage bonds.

To further explain the logic behind the program's expansion, FOMC officials explained, "The continuation of Operation Twist should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative."


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