Fed sticks with low rates, says conditions warrant need for QE3

The Federal Reserve on Wednesday stuck to its plans to keep the federal funds rate at zero to 0.25% at least through mid-2015, and said its decision last month to launch another round of quantitative easing was reaffirmed by “moderate” economic activity offset by weak employment growth and business investment.

The QE3 decision “should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative,” according to minutes of the Federal Open Market Committee meeting released at the end of its two-day meeting Wednesday.

On Sept. 13, the Fed announced a third round of quantitative easing in which the Fed will purchase an additional $40 billion a month in agency mortgage-backed securities.

The success of QE3 “won't be clear until there is more GDP growth,” said Michael Dueker, chief economist at Russell Investments, in a telephone interview. His own gross domestic product projections for the first quarter of 2014 are only 1.4%, in part because of uncertainty over the looming fiscal cliff and the possibility of spending cuts or tax hikes.

Fiscal uncertainty is the bigger issue now, said Thomas Chow, senior vice president of Delaware Investments and senior portfolio manager for the $1.5 billion Delaware Corporate Bond Fund and $909 million Delaware Extended Duration Bond Fund. Recent Fed action “isn't working perfectly, but it's working better than it has been, in terms of improving risk sentiment.”

“Now we know it has to come from the fiscal side, which has to be controlled by Congress and the administration. At this point, the Fed has done everything they can,” Mr. Chow said in a telephone interview.

Mr. Dueker noted that with Mr. Bernanke's term ending in early 2014, “it's hard to see that the current mid-2015 date (for the end of low federal funds rate) will hold. In my view that's a sensible date, but I don't know how binding it is.”