Iain Edmonds

US Federal Reserve Interest Rate Announcement - January 25, 2012

The US Federal Reserve ushered in a new era of transparency today. Gone are the days of Fed-watchers carefully parsing press-release language for hints on the direction of interest rates. Instead, the Fed’s new communications strategy outlines not only the FOMC’s views on the economy, but also its forecasts of the future path of the federal funds rate. In its first release under the new communications regime, the Fed left the federal funds rate unchanged at 0 - 0.25 per cent and projected the need to keep rates "exceptionally low" until 2014, a move beyond the previous conditional commitment of mid-2013.

The Fed’s transition to enhanced transparency can theoretically provide additional stimulus to the economy by influencing expectations of long-term interest rates. Indeed, long-term rates in the US and Canada were lower following the announcement. However, long-term yields are already so low that the impact on the economy will likely be minimal. The Fed’s commitment may further influence Canadian rates by constraining the ability of the Bank of Canada to raise interest rates without risking a pernicious rise in the Canadian dollar.  We therefore continue to expect a very low interest rate environment for the foreseeable future.