Fed to Maintain Rates Near Zero Through Late 2014

The announcement means that the Fed does not expect the economy to complete its recovery from the 2008 crisis over the next three years. By holding short-term rates near zero beyond mid-2013, its previous estimate, the Fed hopes to hasten that process somewhat by reducing the cost of borrowing.

The Fed said in a statement that the economy had expanded “moderately” in recent weeks, but that unemployment remained at a high level, the housing sector remained in a deep depression, and the possibility of a new financial crisis in Europe continued to threaten the domestic economy.

The statement, released after a two-day meeting of the Fed’s policy-making committee, said that the Fed intended to keep rates near zero until late 2014.

In a separate set of statements, the Fed said that 11 of the 17 members of the committee expected that the Fed would raise interest rates at the end of that period. It noted that the committee expects growth to accelerate over the next three years, from a maximum pace of 2.7 percent this year to a maximum pace of 3.2 percent next year and up to 4 percent in 2014.

This is the first time the Fed has published such detailed predictions by its senior officials about future policy decisions. The Fed’s chairman, Ben S. Bernanke, said Wednesday that he hoped the forecast would stimulate growth by convincing investors that interest rates will remain low for longer than previously expected.

The economic impact, however, is likely to be relatively modest. Investors already expected the Fed to keep rates near zero into 2014, a judgment reflected in the prices of various assets whose values depend on the movement of interest rates.

Moreover, interest rates on many kinds of borrowing already are hovering near historical lows, and pushing rates down gets harder as you approach zero. And tight lending standards make it impossible for many people and businesses to get loans.

“I wouldn’t overstate the Fed’s ability to massively change expectations through its statements,” Mr. Bernanke said at a press conference Wednesday. “It’s important for us to say what we think and it’s important for us to provide the right amount of stimulus to help the economy recover from its currently underutilized condition.”

The new forecast is part of an effort by the Fed to exert greater influence over the expectations of investors to increase the impact of its policies. The Fed can influence current interest rates directly, but its influence over future rates depends on what investors think the Fed will do in the future.

The Fed also issued Wednesday a statement elaborating on its legal mandate to maintain stable prices and to limit unemployment.

The statement said that the Fed aims to increase prices and wages by about 2 percent each year. It is the first time that the Fed has publicly described an inflation target, although its commitment to that goal has been widely understood for years. Mr. Bernanke has long supported a formal inflation target.

The Fed also said that it was equally committed to minimizing unemployment, but that its goal would vary based on economic circumstances. At present, the statement said, it would like the unemployment rate to drop below 6 percent.

The Fed said in a statement that “such clarity facilitates well-informed decision-making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.”

The economic projections that the Fed released Wednesday show that the central bank expects to meet its inflation goal over the next three years, but that unemployment will remain significantly above its goal.

The Fed said that it expects the economy to expand between 2.2 percent and 2.7 percent this year, a slightly slower pace than its November forecast that growth could reach 2.9 percent. The Fed also reduced its forecast of growth in 2013. It now projects growth of up to 3.2 percent instead of 3.5 percent.

Article source: http://www.nytimes.com/2012/01/26/business/economy/fed-to-maintain-rates-near-zero-through-late-2014.html?partner=rss&emc=rss