Fed promises low interest rates for two more years

Amanda Carey Contributor
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Tuesday the Federal Open Market Committee (FOMC) announced its intention to “keep the target range for the federal funds rate at zero to 1/4 percent” for at least another two years.

The FOMC’s move comes after two weeks of plunging stock markets. The artificially low interest rates are an attempt to ease the pain caused by slow growth and an economy on the verge of inflation.

Less than two hours after the announcement, the Dow Jones Industrial Average skyrocketed, jumping more than 400 points.

“The Committee currently anticipates that economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013,” says the FOMC’s statement.

Tuesday’s announcement also reiterated the committee’s commitment to reinvest principal payments from its securities holdings.

The FOMC blamed the staggering economy on a deterioration in labor market conditions, rising unemployment, stagnating household spending and “investment in nonresidential structures.”

The housing sector is still depressed, the Tuesday FOMC statement added. And temporary factors, including global impacts of the Japan earthquake, are only partially responsible for the weak economy.

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability,” the statement reads.  “The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.”

The FOMC also vowed to pay close attention to inflation levels in the near future, although it anticipates that inflation “will settle, over coming quarters.”

The Federal Open Market Committee consists of seven Federal Reserve Board members and five of the twelve Federal Reserve Bank presidents. Members Richard Fisher of the Dallas Federal Reserve, Narayana Kocherlakota of Minneapolis, and Charles Plosser of Philadelphia voted against the committee’s decision.

Prior to the Fed’s announcement, James Rickards, senior managing director of Tangent Capital, rightly predicted that a third round of quantitative easing (QE3) was unlikely for three reasons: QE2 was unsuccessful, Europe’s finances are still in too much turmoil, and the Fed will likely make more substantive decisions on policy in late August.

The status quo, said Rickards, is here to stay.

“You have a weak president, a Fed that’s on hold, a dysfunctional Congress, and growth falling off a cliff and markets on the edge of panic,” he told The Daily Caller.  “There’s your scenario.”