Federal Reserve: Interest Rates to Remain Low

The Federal Reserve wrapped up its two day monetary policy meeting today, and has decided to maintain low interest rates due to the current economic situation, which appears to have taken a turn for the worse since the last Federal Reserve meeting, or at the very least has not improved.  Anyway, lets take a look at the Federal Reserve statement.

On the economic recovery: the committee said that “the economic recovery is proceeding and that the labor market is improving gradually.  Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit”.  I don’t know what evidence lends credence to the idea that the labor market is improving gradually.  Possibly the situation has not deteriorated, but when the census is taken away from the employment numbers, there does not seem to be much improvement.  U-3 unemployment is currently running at 9.7 percent, and the broader measure of unemployment, U-6 is running at 16.6 percent.  Both numbers are slightly down from the previous month, but the numbers are skewed by census hiring.

“Employers remain reluctant to add to payrolls”.  Hmm.  This runs somewhat counter to the previous statement.  Anecdotally, it certainly seems accurate.  There was a report today from the AP that said that many major CEOs plan to ramp up hiring, so maybe this will turn around soon.

“Housing starts remain at a depressed level.  Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad“.  Check, check, and check.  New home sales hit an all-time low in May.  It would take a crystal ball to know what is going to go on with the situation in Europe, but it doesn’t seem very promising.  On the whole this statement seems accurate.

“The pace of economic recovery is likely to be moderate for a time”. This seems correct.  All signs point to a decelerating economy.  The housing market is weakening post-tax credit.  Consumer spending is down.  Employment is not picking up.  Seems like this will be a long, long, recovery.

“Inflation is likely to be subdued for some time”. Yup.  Right now inflation is running around 1.5 percent, which is below the 2 percent target rate of the Federal Reserve.  Some people have even mentioned possible deflationary scenarios.

“[economic conditions] are likely to warrant exceptionally low levels of the federal funds rate for an extended period”.  Another statement, and no changes.  At some point here, the Federal Reserve will raise rates.  It doesn’t appear to be any time soon.