Good news for ARMs: Interest rates won’t go up soon

09/19/2014

Good news for ARMs: Interest rates won’t go up soon

WASHINGTON – Sept. 18, 2014 – The Federal Reserve said Wednesday the labor market is strengthening but still needs the central bank's support, reassuring financial markets that a key interest rate will stay near zero in the months ahead.

In a statement following a two-day meeting, the Fed reiterated that its benchmark short-term rate will remain at zero to 0.25 percent for "a considerable time" after its bond purchases end. Fed policymakers said the improving job market led them to continue to reduce the purchases – which have held down long-term interest rates – by $10 billion to $15 billion a month. They plan to end the program at their Oct. 28-29 meeting, assuming the labor market continues to improve.

While job growth has strengthened this year, millions of Americans have been unemployed more than six months. Others have stopped looking for work.

"There are too many people who want jobs who can't find them," Fed Chair Janet Yellen said at a news conference.

Stocks slipped right after the Fed's statement was released at 2 p.m. ET, but the Dow Jones industrial average ended the day at a record of 17,156.85.

Some economists expected the Fed to remove the "considerable time" wording from its statement. The jobless rate has fallen to 6.1 percent from 7.2 percent over the past year, and the Fed said Wednesday it expects it to drop to about 5.9 percent by year's end, below its June forecast.

But the Fed also trimmed its economic growth estimate for 2014, projecting gross domestic product will increase about 2.1 percent, a bit below its previous forecast. Policymakers also noted that inflation has been running below the Fed's "longer-run objective."

Despite Fed policymakers' assurance that the federal funds rate – which affects borrowing costs across the economy – likely will stay low, their forecasts Wednesday show they expect it to rise slightly more rapidly than they had in June. They predict it will be about 1.3 percent by the end of the year and about 2.9 percent at the end of 2016. Those estimates continue to suggest the first rate hike is likely to occur in mid-2015.

The Fed also finalized its plan for raising the fed funds rate, which is what banks charge one another for overnight loans. The Fed plans to raise the rate it pays banks to park money at the Fed and the rate it pays money-market funds for loans. Banks likely would not lend to each other for less than what the Fed pays.

Copyright © 2014 USA TODAY, Paul Davidson.

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