Fed Now More Likely to Extend Near-Zero Rate Into 2015

The disappointing jobs report for August is likely to push the Federal Reserve into further action, either by unleashing another round of debt purchases or pushing back its key benchmark interest rate to 2015, or both.
Whatever its action, the Fed’s move will likely keep interest rates on mortgages and other loan products near current lows for a longer period of time than economists had expected earlier in the economic recovery.
The nation added 96,000 jobs in August, compared with a revised figure of 141,000 in July. That is well below the 125,000 level economists expected.
It is now widely expected that the Fed will take further action to stimulate the economy when the its Open Market committee convenes on Wednesday and Thursday.
A few days ago, Fed Chairman Ben Bernanke called the unemployment level a “grave concern.” The unemployment rate has been above 8 percent since February 2009.
For August, the jobless rate did fall to 8.1 percent from 8.3 percent because more people left the work force entirely.
In response to the weak economic recovery and accompanying credit crunch, the Fed has said it would hold its benchmark federal funds rate at zero to .25 percent “at least through late 2014.” It has held this posture since the aftermath of the financial crisis of late 2008.
Banks use the target funds rate set by the central bank as a benchmark for setting interest rates for prime loan customers. A higher funds rate would mean subsequent higher rates on credit cards, home equity lines and mortgages.
Earlier this year when the recovery seemed on more solid ground, market observers and economists felt the Fed would abandon its hard line on its key lending rate.
Financial markets participants and economists have been critical of the Federal Reserve’s die-hard posture of keeping the benchmark federal funds rate at near zero through late 2014.
The March Fed Survey by CNBC found that nine out of 10 market participants and economists didn’t expect the Fed would wait that long before modifying its policy for the first time since 2008.
At the time, 54 percent say the first Fed rate increase would come by 2013.

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