The Fed Freeze: There Is No Crystal Ball

Bruce Daniels, Senior Vice President, Middle Market Banking, SalemFive

In a move to shore up the financial markets and the economy generally, the Federal Reserve and the rate-setting Federal Open Market Committee recently announced their intention to maintain short-term interest rates at their current low levels for the next two years. In its formal announcement, the Committee stated that it “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.”

The Fed added that it would “continue to assess the economic outlook” and was prepared to employ policy tools “as appropriate,” an indication that it would consider further action, if and when it’s needed.

This action by the Fed was unprecedented in terms of its specificity and represents both good and bad news. For consumers and businesses, it provides much greater certainty regarding the availability of low-cost funds as they consider making investments or major purchases, which is clearly good news.

The bad news is, of course, that the Fed took the action in large part due to fears regarding the health of the U.S. economy, noting that “economic growth so far this year has been considerably slower” than expected and that threats to the economy have mounted.

Wall Street was quick to cheer the Fed’s move, but clearly no one can be sure about its ultimate impact. In some cases, it may give businesses a green light of sorts to move ahead with projects that had been on hold. In other cases, it may actually result in people delaying investment decisions, as they wait to see what happens to the economy during the next 12 to 18 months without fear of facing a rising interest rate environment.

Time will tell. As mentioned above, the good news is that, for both consumers and businesses, the interest rate environment is extremely attractive and will remain so for the foreseeable future.

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