Federal Reserve to Keep Interest Rates Low for Next Two Years

The Federal Reserve board met yesterday to come up with a plan for stemming the overwhelmingly negative economic tide that has overcome the country in the wake of a very public battle over the federal debt and a downgrading of the nation’s credit. The result was a bit shocking, as the Fed determined that it would keep interest rates low – almost at zero for the official inter-bank Fed Funds rate – for at least the next two years. For a board that rarely comments publicly on the direction of rates for more than a few months at a time, the long-term commitment to keeping money cheap was surprising.

Also interesting is that there were three dissenters among the board, the largest number of members disagreeing with an official action since 1992. The move propped up the equities markets, which had been obliterated over the course of the past several days, and also drove down the rate on short-term Treasuries. In addition to the move to keep rates so low, the Fed has also hinted that it will take further steps if necessary.

That is very thinly-veiled language that indicates that QE3 may be coming, a process by which the Fed would purchase Treasury securities or, in essence, print more money. Said Alberto Bernal, the head of emerging markets fixed-income research at Bulltick Capital Markets, "If they have to act they will. They didn’t act today because they didn’t want to send a specific message of panic." Still, the Fed did note that the growth of the U.S. economy was expected to be very slow and that unemployment, currently at 9.1% nationwide, would improve slowly as well.