Stocks dropped slightly after the Federal Reserve announced Wednesday that it was making no change to U.S. interest rates. In addition, the Fed’s decision not to introduce a third round of quantitative easing when QE2 ends on June 30 had the market slumping.
In the announcement released by the Federal Open Market Committee (FOMC), the Fed said the economic recovery is continuing at a moderate pace, “though somewhat more slowly than the Committee had expected,” with the labor market showing more weakness than anticipated. “The Committee continues to anticipate that 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 for an extended period,” the FOMC said.
As economists had expected, the FOMC maintained the federal funds rate at 0% to 0.25% and expressed no plans for QE3. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.
In a wide-ranging press conference held after the announcement, Fed Chairman Ben Bernanke (above) held to the FOMC script, but he did elaborate on a number of questions about where the U.S. economy is headed.
In particular, reporters pressed Bernanke on the Fed’s use of the term “extended period," which has accompanied FOMC announcements for months. “We use the term ‘extended period’ not to be intentionally opaque, but because we don’t know how long” the federal funds rate will remain at such depressed levels, Bernanke said.
Future rate policy will depend on how the economy, inflation and unemployment evolve. “If we do get job creation and inflation closer to expected level, we can look at an exit period,” from keeping rates low, he added.
Bernanke predicted that U.S. growth will pick up in 2012 but at a lower pace of growth than the Fed had predicted in April. The Fed expects unemployment to decline near term to a rate of somewhere between 8.6% and 8.9% before heading even lower in 2012.
Looking at the debt crisis in Greece, Bernanke said the Fed is in close contact with European central bankers and talking about how to avert threats to European unity. Domestically, he said, the U.S. deficit crisis cannot be resolved with sudden and severe cuts, as threatened by Congress.