Federal Reserve & Interest Rates

The Federal Open Market Committee met this week and to no ones surprise left interest unchanged once again and issued a press release following their meeting.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

There have been call from some circles to raise interest rates recently, most notably from former Fed Chairman Alan Greenspan.  While GDP grew once again in the last quarter, signaling the end of the recession, numerous problems still lie ahead for the economy.

The banking system is still in a fragile state, with many financial institutions hoarding cash, still reluctant to lend to consumers whose demand for credit is also well below normal levels.  The housing market, while it has had increased activity as of late, has yet to recover and that could still be years away.

Consumer spending is also way down and many household have increased their savings rate, with an uncertain labor market for the foreseeable future.  The economy is just at the start of the recovery phase but much of the positive GDP growth from last quarter was mostly due to the fact of the increased fiscal spending the government has undertaken over the past year.

It may be as much a year, if not longer before the Fed raises interest rates once again or begins shrinking it’s balance sheet for that matter.  While the Fed has to be careful about timing it’s exist strategy, with the current state of the economy, monetary easing doesn’t appear warranted just yet.

The Labor Department released it’s September job’s report on Friday which had higher than forecast job losses.  This brings the total job losses since the recession began up to 7.2 million, the highest figures since the Great Depression.

Nonfarm payroll employment continued to decline in September (-263,000), and the unemployment rate (9.8 percent) continued to trend up, the U.S. Bureau of Labor Statistics reported today. The largest job losses were in construction,manufacturing, retail trade, and government. 

Many economists feel that the labor situation won’t improve for some time and that the unemployment rate could still be above the 9% mark into 2011.  This has prompted the Obama Administration to release a statement that it will “explore any and all additional measures” to spur growth.

The report is also a sobering reminder for many investors that the recovery is likely to be slow and will have some hiccups along the way.  The Federal Reserve also appears to be committed to keeping interest rates at near zero for at least another year, as inflation forecasts remain moderate for the next two years despite the explosive growth of the nation’s debt load.

While there has been recent talk of the government’s possible exit strategy from monetary and fiscal stimulus, it is apparent that it will need to be a slow and gradual process.  The risks of a double dip recession appears to be minimal at this time but the banking system is still in a fragile state and consumer spending remains depressed.

The Labor Department released it’s August job’s report on Friday which show the rate of job losses are slowly declining from the start of the year when monthly losses were averaging over 700k.  The labor situation is slowly getting better but it may be another few months before job creation starts again.

Nonfarm payroll employment continued to decline in August (-216,000), and the unemployment rate rose to 9.7 percent, the U.S. Bureau of Labor Statistics reported today. Although job losses continued in many of the major industry sectors in August, the declines have moderated in recent months.

The labor market typically lags behind the rest of the economy as businesses reallocate resources and many experts believe it won’t be until the start of next year before the labor market starts it’s own recovery.  We saw a large jump in job losses following the collapse of Lehman Brothers at the height of the financial crisis and the economy has shed nearly 7 million jobs since the beginning of the recession.

The situation will be slow to improve as the economy has mostly depended on massive government spending, in the absence of consumer spending, to work it’s way out recession.  The job creation aspects of this year’s stimulus package will take a couple more years before the economy sees the full benefit so even when the losses do stop, the unemployment rate could be moderately high for some time.

Economists still feel the rate will hit double digits before the year is out but by all appearances the worst appears to be over.  The Fed also appears to be committed to keep interest rates at their current level for some time which should also help matters as credit markets slowly return to normal and businesses gain access to much needed capital.