The Federal Reserve’s policymakers agreed to keep interest rates at historic lows on Tuesday, August 10, as the nation’s economy continues to struggle against deflation threats, lackluster growth, and the possibility of a double-dip recession.
The Federal Open Market Committee (FOMC) voted to maintain the target range for the federal funds rate at zero to 0.25%, saying in a statement that it “continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
Economists had widely expected the Fed’s policymakers to keep interest rates where they are. The FOMC, which holds eight regularly scheduled meetings during the year, has kept rates at historic lows near zero since December 2008.
Doug Roberts, chief investment strategist for ChannelCapitalResearch.com, Shrewsbury, New Jersey, said the most striking part of the FOMC statement was the Fed’s plan to inject liquidity into the economy by using repayments on agency debts such as mortgage-backed securities to buy long-term Treasuries in the 5- to 20-year range.
With short-term rates so low, Roberts said, this is another policy tool in the Fed’s arsenal.
“Whether it has any long-term effect, that’s open to debate,” he said. “Japan did the same thing [in the 1990s], and aside from brief spurts, it really hasn’t done that much for the Japanese economy. What people are hoping is that we’ll have more success than Japan did.”
Specifically, the FOMC stated that to help support the economic recovery in a context of price stability, “the committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.”
While the FOMC didn’t use the term “deflation” outright, it did acknowledge the economy’s potential to slip into a deflationary spiral of lower wages, prices, and consumer demand.