Fed Pledges to Hold Rates Near Zero for 'Considerable Time'


Fed will keep near-zero rates for ‘considerable time’

FBN’s Peter Barnes break down details of the latest FOMC statement.

The Federal Reserve’s decision-making committee signaled Wednesday it might raise short-term interest rates sooner next year than it previously suggested. The Federal Open Market Committee also announced it will continue reducing its monthly bond purchases, adding only $15 billion to its holdings in October -- $5 billion in agency mortgage-backed securities and $10 billion in Treasurys.

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The committee again said it would likely maintain its historically low interest rate policy for a "considerable time” after concluding its bond-buying program.

Noting economic activity is "expanding at a moderate pace" and the labor market remains significantly underutilized, Fed officials slightly reduced growth expectations for this year, and cut their 2015 gross domestic product forecast to a range between 2.6% and 3%.  In June, officials projected growth next year to register between 3% and 3.2%.

In its latest economic forecasts, the Federal Reserve projected GDP to grow between 2% and 2.2% this year, unemployment to fall between 5.9% and 6%, and inflation at 1.5% to 1.7%. In June, Fed officials projected the economy to expand this year at a rate of 2.1% to 2.3% and unemployment to fall between 6% and 6.1%. The central bank's inflation forecast is unchanged from June.

The Fed statement, following a two-day meeting, represents the end of an extraordinary era for the U.S. central bank as it nears the conclusion of its series of massive bond-buying programs. Known as quantitative easing, the strategy was designed to lower long-term interest rates and, in the process, expanded the Fed’s balance sheet to more than $4 trillion – more than four times its 2008, pre-crisis size. The committee now begins its slow, gradual march to normalcy, while attempting to guard against inflation and a further slowdown in economic growth.

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Addressing concerns over inflation, the FOMC again said “longer-term inflation expectations have remained stable."

Richard Fisher, the president of the Federal Reserve Bank of Dallas, and Charles Plosser, the Philadelphia Fed Bank president, voted against the policy action. According to the FOMC statement, Fisher believes "the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than is suggested by the committee's stated forward guidance." Plosser objected to the committee's intent to maintain its current range for the federal funds rate for "a considerable time" following the conclusion of the asset-purchase program. According to the statement, Plosser said "such language is time dependent and does not reflect the considerable economic progress that has been made toward the committee's goals."

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