When the Federal Reserve met recently, it announced that it would keep the target for its key interest rate near zero until the unemployment rate improves or inflation picks up.
As MarketWatch remarked after the announcement, “Fed policy has now become an open book, as predictable as the tides.”
It is true that with these announcements, investors are getting an unprecedented new level of transparency from the Fed. The Fed said it is looking to keep a lid on rates until unemployment, which stands at 7.7%, falls to 6.5% or lower.
This is the first time it has stated an economic target. Since the Fed has a dual mandate for price stability and full employment, it is also watching for inflation to climb up to 2.5% from its current annual rate of 1.8%.
Meanwhile, the Fed is extending its stimulus program, saying it would buy $45 billion in Treasuries and $40 billion in mortgage-backed securities each month.
At this point, the federal funds rate has been close to zero for four years. But as we head into 2013 and investors look to position portfolios, many are asking whether next year might be the year when interest rates begin to rise. After all, the Fed doesn’t actually set interest rates; rather it tries to influence them through its monetary policy.
Earlier this year, we identified three major factors that were helping to keep a lid on rates: