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Thursday
Sep132012

Federal Reserve Will Keep Interest Rates Low Through Mid-2015

Chip Somodevilla/Getty Images(WASHINGTON) -- The Federal Reserve announced its highly-anticipated quantitative easing, or its so-called QE3, purchasing additional agency mortgage-backed securities at a pace of $40 billion per month in another effort to stimulate the struggling economy.

The Fed wants to lower near-zero interest rates, citing an "elevated" unemployment rate and "strains in global financial markets."

The Fed said it was "concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions."

Scott Brown, chief economist with Raymond James, said the Fed's policy actions will depend critically on the jobs market. On Friday, the U.S. added a meager 96,000 jobs though the unemployment rate fell to 8.1 percent on account of the unemployed leaving the labor force.

"The idea is that you want to encourage more economic activity," Brown said. "Having low interest rates, consumers are more likely to be able to borrow, take risks and to make car and home purchases."

The Fed's policies will help keep mortgage rates down, though monetary policy affects the economy with a lag.

"People shouldn't expect this to light a fire under the economy right away," he said.

The Federal Reserve released its post-meeting policy statement at 12:30 P.M. eastern time after the Federal Open Market Committee (FOMC) completed its two-day meeting.

The committee also said it will extend the average maturity of its holdings of securities it announced in June through the end of the year.

In its statement, the Federal Reserve said it would keep the federal funds rate at zero to 1/4 percent at least through mid-2015.

The U.S. financial markets spiked after the statement was released. The Dow Jones Industrial average rose 0.81 percent to 13,441 while the S&P 500 was up 0.78 percent to 1,447 minutes after the announcement.

This is the fourth of five economic projections the committee makes a year. The next two-day meeting and projections will take place Dec. 11 and 12.

In previous announcements, the Federal Reserve had said it expected to keep short-term interest rates near zero until 2014.

Brown said Thursday's announcement could be perceived as countering further economic and political headwinds next year.

The so-called fiscal cliff is expected in 2013, which includes the expiration of Bush-era tax cuts and the two percentage point reduction in the payroll tax, plus the start of automatic spending cuts.

"We may see most of that kicked down the road if they extend a portion of Bush tax cuts," Brown said. "But we don't know that. There's a lot of uncertainty which is also a negative."

Ahead of the Federal Reserve's announcement, government-sponsored Freddie Mac announced fixed mortgage rates held steady as the financial markets speculated there would be further stimulus.

The 30-year fixed-rate mortgage averaged 3.55 percent for the week ending Sept. 13, the same as the previous week. Last year at the same time, the 30-year rate averaged 4.09 percent.

The 15-year rate averaged 2.85 percent this week, down from 2.86 percent last week and 3.3 percent a year ago.

"If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability," the central bank said in its statement.

Copyright 2012 ABC News Radio