Federal Reserve will keep interest rates at historic low until unemployment rate drops to 6.5%
Citing the slow pace of jobs growth, Federal Reserve Chairman Ben Bernanke today announced that interest rates will be kept at a historic low until the unemployment rate drops to at least 6.5%.
“The [Federal Open Market Committee] anticipates that its exceptionally low levels of the federal funds rate are likely to be warranted ‘at least as long as the unemployment rate remain above 6.5%,'” Bernanke said. “The committee expects the stated thresholds for employment will not be reached before mid-2015 and projects inflation will remain close to 2% over that period.”
To sustain the housing recovery, the Federal Reserve will continue to buy $40 billion of mortgage-backed securities per month. Doing so will help keep mortgage interest rates low, making it more affordable for people to buy homes or lower their monthly mortgage payments by refinancing their homes.
The Federal Reserve will also purchase about $45 billion of longer-term Treasury securities each month. This also will help keep long-term interest rates low.
The idea is that by maintaining low interest rates, individuals and businesses would be able to borrow money at lower costs to finance big purchases, like homes or cars or equipments (for businesses). The increase in consumer spending (or consumer demand) would in turn drive economic growth and promote hiring.
But cheap borrowing and increased spending could also drive up prices, resulting in inflation. However, the Federal Reserve concluded that inflation will likely remain manageable – and within its 2% threshold – for the foreseeable future.
“We expect to continue asset purchases until we see a substantial improvement in the outlook for the labor market in a context of price stability,” said Bernanke. “Apart from some temporary fluctuations largely reflected swings in energy prices, inflations remain tame and appears likely to run at or below the Federal Open Market Committee’s 2% objective in coming quarters and over the longer-term.”
What’s exceptional about today’s announcement is that the Federal Reserve didn’t set a specific timeline for its latest actions as it has done in the past. Instead, the Federal Reserve is tying a specific economic benchmark – 6.5% unemployment rate – to its monetary policy.
Bernanke explained that the new approach would “make monetary policy more transparent and predictable to the public.”
- WhatTheFolly.com: Transcript: Remarks by Federal Reserve Chairman Ben Bernanke on Dec. 12, 2012
- FederalReserve.gov: Federal Reserve issues FOMC statement
- FederalReserve.gov: Federal Reserve Board and Federal Open Market Committee release economic projections from the December 11-12 FOMC meeting
- NewYorkFed.org: Statement Regarding Purchases of Treasury Securities and Agency Mortgage-Backed Securities
- YouTube.com/FedReserveBoard: Press Conference with FOMC Chairman Ben S. Bernanke
- WhatTheFolly.com: Bernanke blames tight credit for hindering U.S. economic recovery
- WhatTheFolly.com: Transcript: Remarks by Federal Reserve Chairman Ben Bernanke on Sept. 13, 2012