Fed stays the course

Central bank keeps rates near zero and says they'll stay there for "extended period" despite recent signs of economic turnaround.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Chris Isidore, CNNMoney.com senior writer

fed_rate_moves.03.gif
chart_fed_quotes.gif

NEW YORK (CNNMoney.com) -- The Federal Reserve kept its key interest rate near zero once again Wednesday. It added in a statement that although the economy continues to improve, it intends to stay the course in recent months.

The Fed's decision came just one week after the government reported that the economy grew in the third quarter, the first gain after a severe decline over the previous four quarters.

While it was widely assumed that the central bank would leave its federal funds rate in a range of 0% to 0.25%, economists and investors were eager to see how the Fed described the economy in its statement.

The Fed repeated language from earlier statements that economic conditions are "likely to warrant exceptionally low levels of the federal funds rate for an extended period."

The federal funds rate is a benchmark used to set the rates paid on a wide range of business and consumer loans, such as home equity lines and credit cards. It has been near zero since December 2008.

The central bank added that low inflation expectations, among other things, justify the low rates. Some critics who are worried about inflation have been urging the Fed to raise rates sooner rather than later.

Stocks fluctuated after the Fed's announcement and gave up much of the day's earlier gains in the last half-hour of trading.

The Fed did trim its plans to purchase debt of mortgage finance firms Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) to $175 billion, down $25 billion from its previously announced target. It is going ahead with plans to buy $1.25 trillion of mortgage securities backed by those firms though, and anticipates completing all the purchases by March.

Those purchases are part of the Fed's efforts -- beyond low interest rates -- to pump money into the economy and the battered housing market.

Some economists have been urging the central bank to detail its plans to unwind the close to $2 trillion it has injected into the markets as part of its efforts to spur economic growth.

Critics of Fed policy worry that if the central bank keeps that much extra money in the economy too long, it could also feed inflation down the road. If there is too much money in the system chasing too few goods, that typically leads to higher prices.

The Fed said it is monitoring the size and composition of its various programs and is prepared to make changes as warranted. But it reiterated that with the current weakness in the economy, "inflation will remain subdued for some time."

Will the Fed raise rates soon?

While the decision and statement came as no surprise, they did feed into the growing debate among economists about when the Fed will start raising rates.

Michael Strauss, chief economist for Commonfund, an asset manager serving nonprofits, said he doesn't think the Fed will be pushed to raise rates in the near term.

"I think the Fed is willing to take some chances to make sure the recovery really takes hold," he said, adding that the Fed may begin to modestly raise rates in the spring or summer of next year.

But Mark Zandi, chief economist with Moody's Economy.com, said he thinks the central bank will leave rates near zero at least until the end of next year.

He said even if economic growth picks up, there's little reason to raise rates without any signs of inflation on the horizon.

"They've laid down a few markers we can all watch very carefully for when they'll start," he said. "But I think they're a good solid year away from actually raising interest rates." To top of page

Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
5 ways retailers are tracking you If you think pesky salespeople are invading your personal space, check out these 5 technologies that are tracking your movements throughout a store. More
Moto X vs. Droid Turbo: Which Droid should you buy? Motorola has made the two best Android smartphones this year. Here's how they stack up. More
My part-time job is a dead end, but it's all I can find CNNMoney profiles 4 of America's 7 million part-time workers unable to find full-time jobs. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.