Federal Reserve on Wednesday announced it will keep the federal funds rate within a zero to 0.25% target for at least two years and will continue reinvesting principal from its securities holdings.
“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 late 2014,” the rate-setting panel said in a statement issued at the conclusion of a two-day Federal Open Market Committee meeting in Washington.
The committee also agreed to keep its policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities along with rolling over maturing Treasury securities, but said it “is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.”
The committee “is still debating” additional purchases, Fed Chairman Ben S. Bernanke said in a news conference Wednesday afternoon. “Expanding the balance sheet certainly remains an option,” he said.
Wednesday's announcement “shouldn't have that big an impact” on the bond market, said Bret Barker, portfolio manager for government securities at TCW Group in Los Angeles. “The market right now is priced for mid-2014 for the first hike. This is more of an implicit interest rate cap.”
The longer time frame for lower rates “is a little surprising given the flow of information about the economy,” said Ken Taubes, U.S. CIO for Pioneer Investments, Boston. As manager for Pioneer's core and core-plus strategies, Mr. Taubes finds U.S. Treasuries “very unattractive. The yields represent poor value.”
The good news, Mr. Taubes said in a telephone interview, is that companies are doing fairly well, which makes corporate bonds and equities look good.