Following a slow start on Wall Street on Wednesday, US stocks rebounded on news that the Federal Reserve intends to keep interest rates low through to late 2014 – an adjustment of its previous indication that rates would be kept low through to mid-2013. The announcement came as the Fed’s two-day policy meeting drew to a close, and by the end of the day the Dow Jones industrial average had gained 83 points, recovering from its loss of 95 points in the morning trading session. The Standard & Poor’s 500 gained 11 points, after having lost 7 points earlier. The Nasdaq composite added 32 points, with Apple and software company CA Inc reporting better than expected earnings and boosting the tech-favored index.
While investors are clearly encouraged by the Federal Reserve’s commitment to low interest rates, in view of favorable economic data of late there are some who are questioning why the Fed is being so cautious. The federal funds rate is one of the Fed’s main avenues for stimulating the sluggish economy as it determines the interest rate charged by banks to one another for overnight loans. The goal of keeping this rate low, is to lower interest rates on all consumer-based loans, from mortgages through to student loans, thereby stimulating consumer spending – the driving factor behind economic growth.
Federal Reserve Chairman Ben Bernanke also made it known that additional policies for stimulating the US economy are still an option, including bond buying measures referred to as quantitative easing. Economists have been quick to caution that the Federal Reserve’s interest rate decision is merely a forecast and not a concrete promise. The situation could very well change – and the Fed reserves the right to make changes – if US economic recovery gains momentum.
As is the custom at the first Federal Reserve policy meeting of the year, voting members were reviewed. Four new regional Fed presidents were given voting powers, being Sandra Pianalto of Cleveland, Jeffrey Lacker of Richmond, John Williams of San Francisco, and Dennis Lockhart of Atlanta. Lacker was reportedly the sole voice of dissent with the interest rate policy decision on Wednesday, noting that he would have preferred not to have a timeframe attached to the low interest rates.
