Explaining The Federal Reserve’s September 21, 2011 Interest Rate Decision

• Tweet

The Fed gave markets a boost today.

Downside Economic Risks

Wednesday, the Federal Open Market Committee voted to leave the Fed Funds Rate unchanged within its current target range of 0.000-0.250 percent.

The vote was 7-3 -- the second straight meeting from which the FOMC adjourned with 3 dissenters. Prior to that last meeting, there hadn't been 3 FOMC dissenters since 1992.

In its press release, the Federal Reserve offered a dour outlook for the U.S. economy, noting that since its last meeting in August:

1. Economic growth "remains slow"
2. Unemployment rates "remain elevated"
3. The housing sector "remains depressed"

The Fed also said that there are "significant downside risks" to the economic outlook, tied to strains in the global financial markets. This includes the Eurozone's sovereign debt concerns and the health of banking, in general.

Despite the negative tone of its statement, the Fed did note positives within the economy including ongoing business investment in equipment and software, and lower inflationary pressures on U.S. consumers and businesses.

Click here to get a rate quote.

The Fed Made New Plans -- With A "Twist"

Maintaining low inflation is one of 2 primary Fed mandates. So, with inflation under control, the Fed used its statement to re-iterated its plan to leave the Fed Funds Rate within its current range near 0.000 percent "at least until mid-2013". 

This means that Prime Rate -- the rate to which credit card rates and lines of credits are often tied -- should remain unchanged at 3.250 for at least another 2 years. That's good news for debtors with revolving debt.

Furthermore, as expected, the Federal Reserve launched a market stimulus plan aimed at lowering long-term interest rates.

Known as "The Twist", the Fed will sell $400 billion in Treasury securities with a maturity of 3 years or less, and use its proceeds to buy the same with maturity between 6 and 30 years.

It's a swap; trading in short-term bonds for long-term ones. And the Fed has left the door open to make the program bigger, if needed.

The FOMC's next meeting is a 2-day affair, scheduled for November 1-2, 2011.

Lock In Low, Long-Term Interest Rates

Mortgage market reaction to the FOMC statement has been positive. Mortgage bonds are better and mortgage rates are lower. Sentiment can shift quickly, however -- especially in a market that's as uncertain as this one.

If today's mortgage rates and payments fit your household budget, consider locking in a rate. Rates can change swiftly.

Click here to get a rate quote.