Fed Says Rates to Stay at 0% for Some Time, Slowing Treasury Purchases

The Federal Reserve Open Market Committee met today and described an economy that had bottomed but that will be slow to recover. The full statement is below. I have highlighted key phrases in orange.

Release Date: August 12, 2009

For immediate release

Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

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So, to summarize, the Fed believes that we have hit bottom and will soon begin to grow again. Even with this low growth, the tremendous slack in the economy will prevent an immediate surge in inflation and as a result rates will say low for some time. This means that rates on short term investments tied to the Fed Fund rate - savings accounts, cds, and money markets - will continue to stay low also. And lastly, the Fed is going to slow the purchase of treasury bonds in advance of its discontinuing purchases starting in October.

In response to this statement, the Dow has rallied and is currenlty up 179 points to 9,400. As can be expected, the yield on Treasury bonds increased as investors begin to price in the Fed slowing purchases. Look for long term rates (mortgages, home equities,etc.) to begin rising gradually as the Fed discontinues its purchase program.

So for BestCashCow readers, savings and cd rates will remain low while mortgage and home equity rates will begin to creap up. The economy may be recovering but the news isn't great for savers or those looking to buy a home.