Fed to keep rates low for at least another year

In a Nutshell: "Better growth but more fiscal restraint means the Fed will keep the pedal to the metal."

Rate Decision: Fed funds rate maintained at a range between 0% and 0.25%

The Federal Reserve completed its March two-day meeting and as expected maintained all the policies it has had in place for quite a while. The funds rate will remain close to zero and asset purchases will continue to be used to keep down Treasury and mortgage rates. How long the policy will be kept in place will be determined by the economy. As long as the unemployment rates remains above 6.5% and the inflation rate is below 2.5%, the Fed will keep pushing as hard as possible. Indeed, in the Fed's survey of when policy will be altered, which is released four times a year, fourteen of the nineteen members (Board Governors and regional bank presidents) don't expect that the funds rate will be increased until 2015 or later. Only one believes it could occur this year.

What was interesting in the FOMC's statement was the view on the economy and fiscal policy. Economic growth was deemed to have moved back to more "moderate economic growth following a pause late last year" and "labor market conditions have shown signs of improvement in recent months". But the Committee offset the more optimistic view of the economy with a comment that "fiscal policy has become somewhat more restrictive". Indeed, during the question and answer period, Fed Chairman Bernanke stated that he agreed with estimates that the tax increases and spending cuts could cut growth by 1.5 percentage points this year. And he made it clear that is not a small amount, which given that the economy only grew at a 2.2% once, is an understatement.

So, what does this all mean? The Fed will continue to flood the economy with liquidity for at least the next year. If fiscal policy remains as restrictive as it is right now, it is likely the progress on reducing the unemployment rate will be slowed and we could see rates remain low through 2014 and into 2015. But as I have said before, if the necessary actions to reduce the deficit are spread out, remaining modest when the economy is soft but ramping up when growth accelerates, we could see stronger growth and the Fed would be able to start to withdraw from supporting the economy earlier. In other words, the ball is in the politicians' court but it appears the members of Congress are those who were cut from their teams. Doesn't give you much confidence, does it?