The Federal Reserve Board’s Federal Open Market Committee has decided to keep interest rates exceptionally low, with the target federal funds rate at between 0 and 1/4 percentage points.
In its statement, the Fed writes:
“The Committee currently anticipates 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 at least through mid-2013.”
It is notable that this decision was not unanimous. Presidents of the three regional Federal Reserve Banks: Richard Fisher (Dallas), Narayana Kocherlakota (Minneapolis), and Charles Plosser (Philadelphia) all voted against the decision. The other notable feature of this statement is that interest rates are expected to stay in place for the next two years. Many economists – including myself – had predicted that rates would go up later this year, and so, this decision reflects the general weaknesses in the economy and need to keep rates lower for longer to stimulate growth.
Reflecting this weakness, the Fed wrote about it in very stark terms:
“Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.”
For manufacturers, this means that interest rates will remain low, but it also suggests that the Federal Reserve remains worried about economic growth moving forward. As such, it will keep its policy in place of maintaining a low federal funds rate, which it has had in place since October 2008.
Chad Moutray is chief economist, National Association of Manufacturers.