The Federal Reserve on Wednesday chose to continue its plan to purchase longer-term securities and hold interest rates low through 2013.
That purchase plan, nicknamed Operation Twist, reinvests principal from holdings in mortgage-basked securities and rolls over maturing Treasury securities. It was introduced in September.
The Fed's Open Market Committee ended its two-day meeting by keeping the federal funds target rate between zero and 0.25%, noting that economic conditions “are likely to warrant exceptionally low” rates at least through mid-2013.
The committee in a statement Wednesday said economic growth had “strengthened somewhat in the third quarter” but that recent indicators “point to continuing weakness” in labor market conditions, unemployment rates and the housing sector. While the panel said it expects “a moderate pace of economic growth over coming quarters,” it also noted “significant downside risks to the economic outlook,” including strains in global financial markets.
Vowing to continue monitoring economic information, the committee said it is “prepared to employ its tools” to promote a stronger economic recovery.
“Given the fix that the economy is in at the moment, I think (the low rates) is the right move, although they can't allow this to run indefinitely,” Owais Rana, head of LDI solutions for J.P. Morgan Asset Management's fixed-income team, said in a telephone interview. “Clearly, there is going to be pressure on the long end of the curve.”
Mr. Rana noted that pension liabilities have been impacted “quite a lot” since the September plan was announced, with more volatility in the discount rate used to calculate them. “The long end of the curve could come down significantly. There could be more pain.”
“Fiduciaries should bite the bullet," and plan on rates staying low, Mr. Rana said. They should “understand your risks and what you can tolerate. Start derisking with a disciplined approach. When rates go back up or investment committees realize that this is the new normal, there is going to be a big surge" to buy long-dated bonds. "I think there will be more acceptance to stick to the day-to-day business as opposed to guessing the markets, particularly from an interest-rate perspective.”