Federal Reserve: Rates not rising any time soon
With interest rates on Treasuries creeping up, the Federal Reserve is expected to send a clear signal to stop speculation that interest rates will rise any time this year.
The big question facing the Federal Open Market Committee, which meets June 23 and 24, is how can it effectively send the signal in a way the market will believe, but still maintain flexibility in case the market conditions change dramatically?The Bank of Canada made a strong statement that it was foregoing any increase until 2010, but the Fed doesn't appear to be ready to make that statement, as it could prove too inflexible if market conditions change rapidly. The Fed's last two statements included "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
While that sounds like interest rates won't go up, the market still sees signs of inflation and are pushing rates higher on Treasuries. The Fed, by its inaction, seems to be signaling that they are comfortable with rate increases for Treasuries.
Yet, the Fed sees an increasing amount of slack in the economy and reported yesterday that the share of the nation's industrial capacity in use dropped to a record low of 68.3 in May. Fed officials continue to warn that the unemployment rate is expected to rise. President Obama said yesterday in a Bloomberg interview that he expects unemployment to reach 10 percent this year, it was 9.4 percent in May.
Even with these negative signs, not all members of the Federal Reserve see bad news. "The economy is doing better and less worse than it was before; I am not surprised to see rates back up," Dallas Fed President Richard Fisher told Bloomberg in a June 15 interview. "There is so much slack in the system. The idea of tightening from where we are -- I don't see it in the immediate future."
It's this mix of news -- some good and some bad -- that makes it hard for the Fed to decide exactly how strong a signal it should send about interest rates. If the FOMC truly does want to keep rates low, it will have to do something to stop rate increases of Treasuries. Actions do speak louder than words when it comes to convincing the market.
Lita Epstein has written more than 25 books including The Complete Idiot's Guide to the Federal Reserve."