Fed's Interest Rates on Hold

At the recent Federal Open Market Committee (FMOC) meeting, the Federal Reserve announced the details of the process it will use to begin raising its target for the federal-funds rate. The FOMC administrators said the agency will keep the rate near zero as long as the national unemployment rate remains above 6.5%, while at the same time the outlook for the overall inflation rate in just one to two years is projected to reach just under 2.5%. Increased transparency at the federal level is good of course, and especially at a time when the current funds-rate target cannot go any lower and the overall demand lags behind. While the FMOC's commitment not to raise interest rates anytime soon might ease many of the nation's current financial worries a bit right now, there are a few problem areas that the Federal Reserve still has yet to address.

In the past the FMOC had said that the current near-zero interest rates were likely to be continued at least through mid-2015, but that doesn't take into account the fact that the hard based predictions that the announcement of rising interest rates at a future distant date might indicate to some investors that the Bank knows something less than optimistic about the economy's future prospects that the general public is unaware of. The overall effect is a rising lack of consumer confidence that may give many American households and businesses more reasons not to spend or invest their cash which could obviously hold back the economy from growing.

This means the Fed has a specific numerical target for unemployment in addition to its inflation target rate that appears to have increased from 2% to 2.5%. Just about a year ago the Fed said that it would not specify a fixed goal for employment because the maximum level of sustainable employment is difficult to estimate and admittedly is not something that could be controlled by the Federal Reserve. Today however, many economists and money managers feel that the central bank needs to specify that it does not have an actual "target" unemployment rate regardless of how much monetary stimulus will be required to reach it. Those in the banking industry know that in the past that type of overreaching has only produced more bad results along with rising inflation and more unemployment.

A better approach would be for the Fed to clarify that the length of time the interest rates will remain super low is dependent upon many different economic outcomes and the bank's real bank's intention is to return to its long-run inflation target. As a result, many observers in the financial markets still feel the Fed needs to clarify its current transitional policy in order to reduce uncertainty about financial conditions going forward.