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Debt Downgrade

Fed to hold rates steady for two years

David Gura Aug 9, 2011
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Debt Downgrade

Fed to hold rates steady for two years

David Gura Aug 9, 2011
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Kai Ryssdal: Very nearly lost in all the hoopla about the S&P downgrade the past couple of days has been this item on the Washington D.C. policy calendar: Today, 9 a.m., Federal Reserve Building, Constitution Ave. in Washington. Regularly scheduled meeting of the Federal Open Market Committee.

The FOMC handles interest rates and, thereby, a healthy chunk of what happens in the American economy. Nobody really thought the Fed would do anything with interest rates today. And they didn’t. But what they did do was pretty remarkable.

In the statement that follows every FOMC meeting, they said they’re going to keep interest rates low — near zero, that is — at least through mid-2013.

From Washington, Marketplace’s David Gura reports.


David Gura: Most economists thought the Federal Reserve would keep interest rates low. Bruce Kasman is chief economist at JPMorgan. He says nobody expected to see a timetable.

Bruce Kasman: To be signaling that you’re likely to be on hold for about two years is a marked departure from anything the Fed has done.

That information was supposed to comfort consumers. Phil Swagel teaches public policy at the University of Maryland.

Phil Swagel: It means that anyone who is planning investment, or planning to borrow or to lend, can have a sense that interest rates will remain low over a long horizon.

But it didn’t seem to calm the markets today. Investors know that at this point, there’s not much else the Fed can do. Its toolbox is empty. It’s out of ammo. Its pantry is bare — you get the idea.

Tom Porcelli is chief U.S. economist for RBC Capital Markets. He says Ben Bernanke is still casting about for other options.

Tom Porcelli: But I think that the truth is, outside of additional bond purchases, we don’t know what else they can actually come up with.

The Fed has purchased more than $1 trillion of bonds through a program called quantitative easing. That happened in two stages, known as QE1 and QE2. But after today’s announcement, economists doubted they’ll see any more buying. At least not any time soon. Three members of the committee voted against today’s statement, with that mid-2013 date.

Swagel: And if they disagree with that, well that means they’re a million miles away from wanting to do QE3.

In Washington, I’m David Gura for Marketplace.

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