Updated Aug. 9, 2011
The Federal Reserve's Open Market Committee on Tuesday decided to keep the federal funds rate at zero to 0.25% at least through mid-2013, noting slower-than-expected economic growth.
“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,” the committee said in a statement.
It's the first time that the committee has stated a specific time period for the rate, according to an agency spokesman.
“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 committee said. “Moreover, downside risks to the economic outlook have increased.”
Chairman Ben S. Bernanke and six commissioners voted for the action, but three members voted against it. The last time that more than two members dissented was 1992, the spokesman said.
Setting an extended time period for the rate is “noteworthy,” Peter Palfrey, vice president and portfolio manager for fixed-income strategy at Loomis Sayles, said in an interview. “It effectively guaranteed that investors can ride the yield curve down. The Fed did come up with what the market was looking for.”
Instead of a massive flight to Treasury markets, “that’s an extraordinary stimulus to the risk markets, and it probably pushes investors further out (on) the curve. I think the Fed has done something that gives investors some confidence that the Fed’s not going to whipsaw rates.”
Bret Barker, head trader for TCW Group’s government desk, also expects people to “extend out the curve and reach for yield.” However, he added, “It’s hard to get too excited. They left pretty much everything on the table.”
Mr. Barker said that while the odds of QE3 are low, “they are higher than they were before this meeting.”