The Federal Reserve’s statement after yesterday’s Federal Open Market Committee (FOMC) meeting left no doubt as to the Fed’s dual commitment to keeping long term interest rates down and encouraging economic growth.
No changes to the Fed’s current bond-buying program were made during today’s FOMC meeting.
The Fed’s monthly purchase of $85 billion in bonds and MBS works by boosting bond prices, which typically helps with keeping mortgage rates lower.
The Fed reaffirmed its position that it will not withdraw or reduce monetary easing until the unemployment rate is substantially lower.
Unemployment Rate Improving Nationally
Fed predictions for the national unemployment rate improved; December’s outlook for 2013 estimated the unemployment rate at between 7.4 to 7.7 percent; the Fed now expects unemployment rates of 7.3 to 7.5 percent by the end of this year.
February’s jobs report likely influenced this revision as the unemployment rate fell from 7.8 to 7.7 percent.
The Fed notes that while employment rates are improving, they remain elevated which supports the Fed’s decision not to modify its bond purchase program in the near term.
Lower unemployment rates suggest that more people will be financially prepared for buying homes or refinancing their existing mortgage loans, and the unemployment rate is also expected to fall due to growing numbers of baby boomers leaving the workforce.
Lower Inflation Rates Boost Consumer Purchasing Power
The Fed slightly revised its December forecast for 2013 economic growth of between 2.3 to 3.0 percent.
Now the Fed predicts economic growth to range between 2.3 and 2.8 percent in 2013, but negative influences including a higher payroll tax and government spending cuts are expected to slow the rate of economic growth.
Concerning inflation, the Fed expects an inflation rate of between 1.3 and 1.7 percent this year and for inflation to remain below 2 percent through 2015.
Lower inflation rates allow consumers more discretionary spending power, which can further boost the economy and improve consumer confidence in making big ticket purchases including homes and related items and services around the country.
Fed Keeping Tabs On European Economic Issues
Fed officers are continuing to monitor economic developments in Europe, and expressed concerns that the situation remains fragile.
Commenting in a press conference held after the FOMC meeting, Fed Chair Ben Bernanke characterized economic issues in Cyprus as “difficult”, but said that the Fed doesn’t expect these developments to have major impact on U.S. financial markets.
Its plan to keep short term interest rates near zero until unemployment rates reach 6.5 percent or the inflation rate exceeds 2.5 percent further support the Fed’s plan to keep its monetary easing policy intact for the near term.
Unless unexpected or catastrophic events occur which would cause sudden or rapid economic changes, the Fed appears unlikely to announce major changes in its policy.