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Federal Reserve update: September 2011

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Federal Reserve update: September 2011

This month the Federal Open Market Committee (FOMC) announced “Operation Twist,” a plan to sell $400 billion in near-term U.S. securities in the next nine months to purchase an equal amount of longer-term securities. This move aims to lower long-term interest rates and increase borrowing among consumers.

The FOMC said in its announcement that the move is in response to continued weakness in national economic figures, including those on unemployment, consumer spending and the housing sector. The Committee’s announcement also said that while it anticipates the pace of the recovery to improve in coming quarters, it expects unemployment will decline only gradually in the near term. 

The response to Operation Twist has been mixed. But because both short- and long-term interest rates are at historic lows, seeking to narrow the gap between them is one of the few ways the Fed has left to encourage long-term investments.

The federal funds rate

In 2011, the federal funds rate has sat at record lows. The current range of the Federal Funds rate is 0 to 0.25 percent. This low rate is meant to spur economic growth by way of encouraging national spending and borrowing, and the Fed indicated in September that the rate will likely stay at “exceptionally low” levels through mid-2013.

Because of this, interest rates on deposit products, including savings accounts, CDs, money market accounts and checking accounts, are expected to remain near record lows.

The federal funds rate refers to the interest rate at which banks loan money to each other. The FOMC, a part of the Federal Reserve System consisting of 12 members, sets the range for the federal funds rate. Because the federal funds rate affects current interest rates throughout the economy, the FOMC aims to choose a range that will encourage economic stability and prosperity.

Money Rates Interest Rate Forecast 2011-2012

The Fed has maintained an ultra low interest rate policy that looks likely to be in place for the foreseeable future. In announcing that it intends to keep the federal funds rate low through mid-2013, the FOMC is clearly hoping to spur the business investment needed to help lift the economy.   

Still, rising inflation or declining unemployment are two major wild cards that could cause the Fed to hike rates sooner. The current Money Rates forecast for the federal funds rate in 2011 and 2012 is listed below:

October 2011: 0% - 0.25%

December 2011: 0% - 0.25%

February 2012: 0.25% - 0.50%

April 2012: 0.75%

June 2012: 1.00%

August 2012: 1.25%

October 2012: 1.25%

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