The Federal Reserve will reaffirm its low interest rate policy later this afternoon, a person inside the Federal Reserve said.
The central bankers are fearful that any change to the wording of its interest rate policy or economic outlook will cause a huge panic in the stock market, the person said. As a result, it is highly likely the wording about interest rate policy will not change at all.
Of course, the debate is still continuing inside the Fed. Some inside the Fed have argued that the central bank should begin to signal an end to the zero-interest rate policy to strengthen the dollar. But worries about deflation and a lingering recession are holding sway, the person said.
The big debate is about how to acknowledge improved economic conditions without sparking fears of an imminent rate increase, the person said. Balancing concerns about stymieing the recovery by raising fears of a rate hike too early are concerns about the credibility of the Fed. If improved economic conditions are not acknowledged, it is feared that the Fed will be perceived as out of touch. The dominant thinking, however, is that the current statement goes far enough in acknowledging the recovery.
Our source tells us to expect the first sentence to read: “Information received since the Federal Open Market Committee met in September suggests that economic activity continued to pick up following its severe downturn…”
The key sentence on interest rates will likely remain completely unchanged. “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 per cent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” the FOMC said last time.
The only major change in the statement is likely to be the acknowledgment that the Fed’s program of purchasing US Treasuries securities has now been completed.
The person, who has provided reliable information about the thinking inside the Fed in the past, was last exposed to the planning on today’s announcement three hours ago. It is possible, the source warns, that last minute changes could be made to the statement. The Fed doesn’t officially approve its statement until the end of its meeting.
The Fed’s policy-setting Federal Open Market Committee resumed a two-day meeting at about 9 a.m. . The Fed is expected to issue a statement around 2:15 p.m.
As always, please exercise extreme caution when taking any action based on anonymous, single source stories. We trust our source is providing us with reliable information but the information is a few hours old and it is always possible that the source has been misled.