Fed Repeats: Low Interest Rates Into 2013
At its regular policy meeting today, the Federal Reserve Open Market Committee re-affirmed its pledge to keep interest rates low through mid-2013. The committee first made that unprecedented statement at its regular Aug. 9 meeting.
It’s unprecedented, say Fed watchers, because the committee tries to avoid such specific language. Instead, it typically says that it will leave rates low merely for “an extended period.”
Like the Aug. 9 statement, today’s Fed announcement says that economic conditions are likely to warrant “exceptionally low” rates through “at least” mid-2013. Both statements were approved on a 7-3 vote. In August, three members favored the less definite “extended period” language. Today, three members did not support “additional policy accommodation at this time.”
That additional policy accommodation is significant because the Fed voted today to try to keep long-term interest rates low, not just short-term rates. It’s well known that the market, not the Fed sets long-term rates. But today, the Fed announced steps that the committee hopes will keep long-term rates low.
The Fed hopes to pressure long-term interest rates lower by buying long-term bonds. Over the next nine months, it plans to sell short-term securities (under three years in maturity) and use the proceeds to buy long-term Treasuries (6 to 30 years in maturity).
The committee also plans to increase its purchases of mortgage securities, again aimed at keeping long rates low.
On short-term rates, the Fed kept its target rate for “Fed funds” at 0 to 0.25 percent.
The Fed has been in this stance since the housing/financial collapse of 2008-09, and farmers have reaped the benefit through lower borrowing costs.
Many farmers are locking in these low rates, both by converting their loans to lower rates, and by extending maturities on existing loans. For example, the four-state Farm Credit Services of America says it has converted more than $3 billion in loans so far this year.
Many of these refinancing farmers look at the Fed’s mid-2013 promise as something less than rock-solid.
“The Fed’s promise to keep interest rates low for two years is about as valid as me saying I’m going to have 200-bushel corn for the next two years. Nobody can predict in advance,” says central Illinois farmer Tim Seifert.
“The world is changing every day, with events around the world and politics in Washington. A lot can happen before 2013.”
Seifert, who says he was aware of the Aug. 9 announcement, typically gets a phone call or e-mail from his lender when rates fall enough to make refinancing profitable. And he’s already converted some of his loans this year.
Interest rates, both long and short, will eventually rise. With rates currently low, by default the next move is up. Advisers suggest being ready for it.
For several years now, retired economics professor Edmond Seifried has been traveling the country to warn farmers of higher rates. But on Aug. 9 he had to moderate those warnings when the Fed announced its 2013 target.