The Punch Bowl Stays: Fed Keeps Interest Rates Low

The Dow Jones closes at a market high today at 17,156.85 after the Federal Reserve met and announced that interest rates will be staying the same.  The reasons for keeping the federal funds target rate in the 0-0.25% range  based on the  FOMC press release are:

  1. The unemployment rate has barely changed and we are under-utilizing labor resources
  2. The housing sector is recovering slowly

While other reasons that they mention seem to support increasing the interest rate:

  1. Household spending and business investment is rising moderately
  2. Inflation is below the Federal Open Market Committee’s long-run goals

However, in the end the Committee felt that to attend maximum employment and price stability maintaining the current interest rate is best. Additionally, the FOMC will buy federal agency mortgage-backed securities at a pace of $5 billion per month (rather than the $10 billion they were buying) and Treasury securities at a pace of $10 billion per month (rather than the $15 billion they were buying). By holding a large amount of long-term securities, the hope is that long-term interest rates will make “financial conditions more accommodating” (i.e. to support mortgage markets). Lastly, the FOMC mentioned that the 0-0.25% federal funds rate will remain even after the asset-buying program dies down, which is set for October.

The video on the bottom of the USAToday article, here, explains why the stock market moves after a Federal Reserve announcement and what has happened over the past four announcements this year. It is a short one minute and thirteen second video, but it is a fantastic way to catch-up with what has been happening with Federal Reserve. Also, here is a neat response after the FOMC announcement from Brad McMillian, the Chief Investment Officer for Commonwealth Financial:

 

“The Fed is not going to take the punch bowl away. They didn’t want to spook the market.”

 

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