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.

Copyright British Columbia Real Estate Association. Reprinted with permission.