Analysts Anticipate Fed Will Maintain Low Interest Rates

The Federal Reserve is expected to disclose policy directives regarding interest rates this Wednesday, and it is likely that deliberations today and tomorrow will be focused on whether or not to curtail capital injections.

Fed Chairman Bernanke will be watched closely for any hint that the Fed will raise interest rates, but presumably the outlook for the time being is that the Fed will not raise the rates.

The Fed walks a tightrope with its attempts to manage the economy, having gotten into a position where the infrastructure of the economy itself has become somewhat dependent on stimulus from the central bank. As a result, if the Fed removes stimuli too soon it could shatter the crystallizing recovery; too late and inflation could get away from all of us.

Bernanke is bucking for a second term as Fed Chairman and has steadfastly committed himself to reviving the economy, giving clear evidence last week, alongside his colleagues, of a lack of intention to raise rates.

Indeed, so dedicated to moving ahead is Mr. Bernanke, that he has gone out of his way to assure both the legal and fiscal rooms, that when the time is right he intends to drain the stimulus money from the pool and put the entire house in order.

Slowing layoffs and some relatively promising employment data from November, showing a notable decline from October as employment fell to only 10% (with only 11k jobs lost), makes it the best month since the recession started.

Fed sources have warned recently that unemployment would remain high however, citing a lack of momentum in the economy as causing uneasiness among potential employers.

Consumer spending saw a marked spike in October and November despite an inordinately tight consumer credit market, potentially showcasing the hidden potential of consumer spending to spur growth even in a depressed economy, where credit will remain tight throughout the holiday and into the beginning of next year.

Bank of Tokyo-Mitsubishi economist Chris Rupkey spoke of the economy as being on shaky ground by saying “it’s best for the Fed to keep with the script of low interest rates”.

Bernanke’s quote last week about “formidable headwinds” facing the economy clearly pointed to unemployment realities, a tight credit market and subsequent jitters among shoppers. Another thing it seems to clearly point to is that no change will occur from the Fed’s bank lending rate of 0-0.25% set on Dec. 08.

This all seems to undergird the March pledge by the fed to keep rates low for “an extended period”, and is additionally supported by the Fed’s decision to maintain a program designed to lower mortgage rates.

The prime rate for commercial banks will stay at 3.25%, its lowest point in decades as well, which is very important for home equity loans, consumer loans and certain types of credit cards.