Fed keeps rates low until late 2014; signaling slow recovery ahead

The Federal Chairman announced on Wednesday that the Federal Reserve will keep short term interest rates near zero until late 2014, extending a monetary policy that began in 2008 to boost lending and spending in the overall economy. In 2008 during the height of the economic downturn, the Fed slashed interest rates to near zero and purchased $ 2.3 trillion in long term treasuries.

The Fed appears to be moving closer to buying more securities in 2012 to stimulate a weak American recovery, still weighed down by a battered housing sector, while also keeping inflation from sliding too far below its 2% target.

“Economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014,” the Fed Reserve Chairman announced on Wednesday.

The Fed repeated it view that the economy faced “significant downside risks” adding to concerns that the U.S. economy could feel negative impact from an economic slow down in Europe and fiscal uncertainty across the euro zone. 

Speculation is building that the Fed will wait to engage in more quantitative easing after Operation Twist expires at the end of June. Operation Twist involves selling short term bonds while buying long term bonds.

Many economists are expecting the Fed to mainly purchase mortgage bonds after Operation Twist expires.  Bloomberg News survey estimates 500 billion purchases of total debt.

Weak Housing Data

Yesterday, the market absorbed weaker U.S. housing data for December, typically a slow month for housing. The number of Americans signing a contract to by homes dropped in December after previously climbing to the highest level in 1.5 years. The index of sales fell 3.5%.

Despite the weaker housing data, the market rallied on Wednesday after the Fed Chairman announced that rates will be kept low through 2014.  The Dow Jones Industrial Average hit a new high not seen since last May and the NASDAQ hit an 11 year high.

Europe

Greece remains on the radar screen as the top negotiator for private creditors is scheduled to return to Athens later today (Thurs) to continue talks with officials on a debt swap deal.

 

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