The Central Bank Stands Pat

There were no surprises in today’s decision by the Federal Reserve to leave interest rates unchanged, and at nearly zero. The Fed announced that “low rates of resource utilization and a subdued outlook for inflation” are the reasons why interest rates will remain what they call “exceptionally low” until at least the middle of 2013.

 

Although the U.S. central bank stood pat on interest rates, it did give Wall Street a slightly more encouraging view of the economy. “Economic growth strengthened somewhat in the third quarter,” according to the Federal Open Market Committee (FOMC) statement, which added, “Household spending has increased at a somewhat faster pace in recent months.” Of course, the Fed hedged here by citing the “continuing weakness in overall labor market conditions.” It also mentioned the “elevated” unemployment rate as a headwind facing the economy. 

 

Markets pulled back somewhat after the Fed failed to announce any new stimulus, but I still think that if things get worse economically, we could see the central bank move to do what it does best — pump more money into the economy. I don’t know what, precisely, the Fed would do to accomplish this task, but it’s proven in the past that it can be creative when it comes to manipulating monetary policy. A case in point is the Fed’s current commitment to the so-called Operation Twist that swaps short-term debt for long-term debt.

 

As the old saying goes — don’t touch that dial! The Fed’s drama and the struggling economy are far from over.