Fed Interest Rates Remain Stable

?It is unlikely the Federal Reserve Bank will buy more bonds to boost the money supply unless the economy stalls below the 2.5% growth most economists are expecting in 2012.
 
The Federal Reserve's Open Market Committee left interest rates unchanged following an April 25th meeting in Washington, keeping to the central bank's vow to keep interest rates at "exceptionally low'' levels if necessary through late 2014 in the hope that the U.S. economy might pick up in the months ahead. The Fed has maintained federal funds rate at zero to 0.25 percent since December 2008 during the global financial crisis, and has given no sign that it will launch a new round of bond buying to boost the economy.
 
Although Wall Street investors had expected the federal funds rate to stay near zero, some noted that the central bank's statement announcing its latest policy decision indicates that it sees the economy still improving and inflation risks are emerging at the same time, both signs that won’t be any more monetary easing from the bank. Even though the Fed said in a statement last month that “inflation has been subdued in recent months,” the latest bank report maintains that growth will remain moderate over coming quarters and then pick up slowly. This means it is highly unlikely the Fed will buy more bonds to boost the money supply unless the economy grows less than the 2.5% most economists are expecting in 2012.
 
The only action the Fed said it will take is to continue bond-market moves to switch to longer-maturity mortgage-backed securities and government-agency debt from bonds that come due sooner. The move ensures that the “Operation Twist” policy to help stabilize the housing and mortgage markets will remain in effect until it expires in June this year.
The bank maintains that the economy has been expanding moderately, yet the economy has delivered conflicting signs in recent weeks, showing better-than-expected improvement in some areas and disappointing results in others. The recent increase in new unemployment claims along with slow job growth and weak durable goods orders in March are all signs that unemployment could remain high.
 
The Fed might raise rates sooner than late 2014 or be less likely to increase bond buying if it believes unemployment will fall more rapidly or that inflation would rise faster than previous forecasts. The bank might buy more bonds if the economy is growing slower than the estimated 2% and 2.5% potential this year, and be less inclined to do so if it is the economy is growing without increasing the rate of inflation. Inflation has been at or above the Federal Reserve's target levels, and as the economy grows the bank will likely hold off on more quantitative easing (QE). And that’s one thing most economists can agree on; not needing more QE is definitely good for the economy.