Unfortunately for savers, the Fed gave the markets everything they wanted at its FOMC meeting with both QE3 and an extension of its low-rate guidance language. The FOMC policy statement was just released. Here's how QE3 is described:
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.
The Fed pushed out its low-rate guidance language from late-2014 to mid-2015. Here's the new paragraph about the federal funds rate:
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.
Unfortunately, they even went further with this guidance by adding the language that "the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens." I've heard the pundits say this could mean that when the Fed finally hikes rates, those rate hikes will be small and slow.
Only Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, voted against the policy. He was against both QE3 and the low-rate guidance. According to the statement, Lacker "opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted."
I'm afraid these very low rates are here to stay for a long time.
At 2:15 PM EDT Chairman Bernanke will be holding a press briefing in which he'll be discussing the FOMC policy decisions. I'll update this post with any news from that press briefing.
Update 3:55pm: Before Chairman Bernanke took reporters' questions in his press briefing, he addressed the following 3 concerns that have been raised regarding the Fed's accommodative monetary policy:
- The notion that the Fed's security purchases are akin to fiscal spending
- A policy of very low rates hurt savers
- The Fed's policies risk inflation down the road
I transcribed Chairman Bernanke's reply to the second concern below:
My colleagues and I are very much aware that holders of interest bearing assets such as certificates of deposit are receiving very low returns. But low interest rates also support the value of many other assets that Americans own such as homes and businesses, large and small. Indeed, in general healthy investment returns cannot be sustained in a weak economy, and of course it's difficult to save for retirement or other goals without the income from a job. Thus, while low interest rates do impose some costs, Americans will ultimately benefit most from the healthy and growing economy that low interest rates help promote.
This is essentially the same reply Chairman Bernanke has stated when asked about this issue in the last couple of years. He basically says that low rates are needed to help the economy, and that has priority. In his view, savers will be helped in the long run with the return of a strong economy. Unfortunately, ultra low interest rates don't do much to help the economy as we have seen now for almost 4 years. I wonder how many years it will take for the Fed to realize this.
The remaining FOMC meetings for the year are scheduled for October 23-24 and December 11-12.