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Fed ignores fiscal cliff, conducts business as usual

December 12, 2012

| MoneyRates.com Senior Financial Analyst, CFA

It must be a bit like opening for the Beatles. The Federal Reserve concluded a meeting today that seems destined to be almost completely overshadowed by the fiscal cliff.

As much attention as the Federal Open Market Committee (FOMC) meetings draw from the press and the financial markets, at this point they have little power to surprise. Monetary policy has done about all it can do. Furthermore, the wide range of possible outcomes to the fiscal cliff discussions greatly outweigh -- for better or worse -- the impact of monetary policy.

About today's statement

Today's FOMC statement described the economy as growing, but not quickly enough. Given the slow pace of growth, and the fact that the FOMC seems satisfied that inflation is under control, the Fed will continue the stimulative measures that have been in place for the last couple years: keeping interest rates near zero on the short end, and purchasing long-term Treasury and mortgage securities to help hold longer rates down.

Curiously, today's FOMC statement did not acknowledge the looming fiscal cliff deadline. This seems a missed opportunity for the Fed to weigh in on the importance of a constructive compromise, and at minimum it would have been appropriate for the Fed's statement on the outlook for the economy to acknowledge the tremendous uncertainty that exists until the fiscal cliff situation is resolved.

The FOMC even issued updated economic projections for the coming years that represent little change from the previous projections. This seemed to suggest an assumption that the fiscal cliff standoff will be resolved satisfactorily, and Fed Chairman Ben Bernanke confirmed this notion in a news conference following the meeting. But he also added that, were the country to sail off the fiscal cliff, the Fed's tools would not likely be able to offset the effects.

Impact on the fed funds rate

The FOMC statement outlined an intention to keep the federal funds rate near zero -- specifically, between zero and 0.25 percent -- for the foreseeable future. Rather than talking in terms of a time-frame for continuing this policy, the statement focused on a goal of bringing unemployment down to 6.5 percent before contemplating a change in fed funds policy.

As always, the Fed notes that this low rate policy is contingent upon inflation remaining within acceptable limits.

The MoneyRates outlook

What does this mean for various forms of bank rates? Well, it will take a sustained period of decent economic growth to bring unemployment down to 6.5 percent, so expect most savings account rates, money market rates, and short-term CD rates to remain below 1 percent through at least most of 2013. If the economy does start to strengthen, expect long-term rates like mortgages to be the first to start to rise.

Whether the Fed chooses to acknowledge the fiscal cliff or not, it could have a tremendous impact on bank rates. While there is not much room for rates to fall further, too much immediate austerity could hold those rates down for an even longer period, while an enlightened solution could bring a turn in rates closer to the first half of next year.

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