The Federal Reserve is cautious about declaring the recession over. On January 25, 2012, after a two-day policy meeting, Federal Reserve chairman Ben Bernanke declared an extension to the period in which the central bank will keep interest rates at already low levels and said the Fed most likely won’t raise interest rates until the last half of 2014.
Until 2014, the U.S. central bank would keep interest rates at the current 0.25 percent level.[1] Some members hinted there might be another monetary policy stimulus in the making. Markets rallied strongly to the Fed news.
Bernanke indicated that the economy faces “significant downside risks,”[2] even though manufacturing, housing and employment figures have improved in 2012. Employers added 200,000 jobs in December and the unemployment rate dropped from 8.7 percent to 8.5 percent. Orders for durable manufactured goods increased in December, along with business spending on machinery and equipment, all solid indications of an economic recovery.
Despite this good news, the Fed still lowered its projection for growth this year and also its predictions for expansion of the economy. While the projections were only slightly lower, the Fed is still “not ready to declare that we’ve entered a new stronger phase”[3] for the U.S. economy, Bernanke said.
Policy makers are “prepared to provide further monetary accommodation if unemployment is not making sufficient progress towards our assessment of its maximum level, or inflation shows signs of moving further below its mandate-consistent rate,” according to Bernanke, who added that bond buying was another option the Federal Reserve might take.
The housing market, which still struggles to recover from the financial crisis of 2008, is one of the more worrisome items on the Fed’s agenda. Housing prices have declined 33 percent from 2006 highs, costing homeowners an estimated $7 trillion in losses.[4] The appalling result is that many Americans are paying more on their mortgage loans than what their properties are worth.
Fannie Mae’s vice president and chief economist, Doug Duncan, is somewhat optimistic about the housing market, saying that, if employment continues to strengthen and housing prices rise over the next year, “it is unlikely that the Fed will be able to keep its low interest pledge for long, and a more meaningful housing recovery may not be far behind if consumers are faced with the prospect of rising mortgage rates and home prices amid increased job security.”[5] The Fed will maintain its policy of re-investing maturing housing debt into agency mortgage-backed securities. Keeping rates low for a longer period will make it more likely that the Fed’s will do more bond buying.
Therefore, the three main items to come from the announcement were low inflation estimates, interest rates that will remain low until 2014, and potential pledges of further monetary help if employment doesn’t do the trick!
[1] http://forexalliance.com/2012/01/federal-reserve-extends-interest-rate-pledge/
[2] http://www.euronews.net/2012/01/25/fed-rate-vow-signals-recovery-is-a-long-way-off/
[3] http://www.bloomberg.com/news/2012-01-25/fed-says-benchmark-interest-rate-will-remain-low-until-at-least-late-2014.html
[4] http://www.euronews.net/2012/01/25/fed-rate-vow-signals-recovery-is-a-long-way-off/
[5] http://www.fanniemae.com/portal/research-and-analysis/housing-monthly.html
