October 30th, 2014
On Oct. 29, the Federal Reserve issued a statement from the Federal Open Market Committee (FOMC) that noted the federal funds rate will remain near 0 percent for “a considerable time.” This announcement comes as the Fed ends its monthly bond-purchasing program known as quantitative easing (QE), which provided stimulus as the economy recovered following the recession.
“The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored,” the FOMC said.
There has been a lot of speculation whether the Fed would raise the key funds rate sooner than expected. Among its benchmarks for doing so are gains in the employment sector and inflation, with the Fed originally setting a goal for unemployment to dip below 6.5 percent – a feat that has been achieved for some time. However, Fed Chair Janet Yellen has repeatedly noted she wants to see more improvement from wages.
Implications of the announcement
Given that the Fed regulates monetary policy in the U.S., many analyst closely watch these announcements and how the stock and other markets respond. One immediately discernible outcome is mortgage rates are likely to continue hovering around low ranges, which means potential homeowners can continue to access affordable financing.
The benefits of low rates have already been shown through interest in refinancing, as reported by the Mortgage Bankers Association. For the week ending Oct. 24, refinance applications accounted for 65 percent of all originations for the second consecutive week as homeowners sought to cash in on interest rates that are lower than their initial ones.
Despite the Fed’s ambiguous timeline for adjusting the funds rate, many economists speculate the change will come mid-2015, The Wall Street Journal reported. The Fed announcement noted any adjustment is contingent upon economic activity, as faster-than-expected improvements in inflation and employment could hasten the timeline. If growth is slower than anticipated, however, the timeline will be pushed back.
In any case, the Fed anticipates foregoing an adjustment for some time after its goals are met to allow the economy time to stabilize for higher interest rates.