The Washington Post
26 January 2012
The Federal Reserve said Wednesday that unemployment will remain so high over the next three years that the central bank will probably keep interest rates near zero for that period, more than a year longer than previously indicated. The announcement significantly extends the Fed’s commitment to taking steps to help drive economic growth.
The Fed did not meet the demands of economists who say it should be taking immediate and dramatic action to try to reduce joblessness. But the Fed made clear that remains an option if economic growth doesn’t speed up soon.
“We’re certainly prepared to look for different ways to provide support to the economy if, in fact, we have this unsatisfactory situation,” Fed Chairman Ben S. Bernanke said after a policymaking session.
At its first policymaking session of the year, the Fed signaled that it was not planning to rest despite the recent bright spots in the economy. The unemployment rate, for instance, has recently fallen to its lowest level in nearly two years.
But Fed policymakers project that the unemployment rate will remain at 8.5 percent for much of this year and only fall to between 6.7 and 7.6 percent by the end of 2014, when they plan to begin to raise rates.
In its policy statement, the Fed said that the economy has been growing “moderately” but warned that the depressed housing market and the economic downturn abroad presented significant head winds. As a result, the Fed strongly suggested that it was not worried that excessive action would overstimulate the economy and send the prices of goods and services soaring.
“The message is that when it comes to Committee statements and actions, this is still the Chairman’s Committee, and as long as Bernanke is the Chairman — at least through early 2014 — the Fed will remain growth-friendly and committed to doing all it can to insure the economy recovers,” Michael Feroli, an economist with J.P. Morgan Chase, said in a research memo.
The Fed is now perhaps the only government actor that can move unilaterally to stimulate the economy. While President Obama has made a number of proposals to lift economic growth in the near term — including in Tuesday’s State of the Union address — Republicans in Congress have so far objected.
At the end of the two-day meeting, the Fed for the first time disclosed two key details to the public. First, the Fed formally said what analysts have assumed was its position: that inflation should increase, on average, 2 percent per year. The Fed projected Wednesday that inflation would be at or slightly below its target in the next few years.
The Fed also released projections from 17 of its senior officials for the course of interest rates. The Fed had said it planned to keep interest rates extremely low through mid-2013.
The new projections show that 11 Fed leaders believe it is appropriate to start raising rates only in 2014 — or later. The other six Fed officials favor raising rates this year or next.
The publication of the inflation target and interest rate projections fulfill one of Bernanke’s goals of increasing openness at the Fed, something he advocated as an academic. Bernanke also introduced periodic news conferences and has spoken in far more plain terms than his predecessors.
The Fed took pains on Wednesday to make clear that it gives as much weight to its legal mandate to foster “maximum employment” as it does to its mandate to keep inflation subdued. After being criticized by economists for repeatedly underestimating the depth of economic challenges facing the country, Fed officials do not want to be accused yet again of doing too little.
Most Fed leaders also said that when the central bank does act to raise interest rates, it should do so very gradually, according to Fed documents. Most believe that interest rates should still be well below 1 percent at the end of 2014, according to the projections.
Only one Fed official — Jeffrey M. Lacker of the Federal Reserve Bank of Richmond — voted against the policy statement, saying he did not want to describe how long the Fed expected to keep interest rates at record low levels.
That lone dissent was a sign that Bernanke may have more power to shape decisions this year at the central bank, which was highly divided last year over the course of policy.
Many economists and several Fed leaders argue that the central bank should create money and use it to buy and hold mortgages, driving interest rates lower.
“Expanding the balance sheet certainly remains an option,” Bernanke said. “One that we’d consider very seriously in particular if progress towards full employment became more inadequate or inflation remained exceptionally low.”
To make the most of its low-interest-rate policies, Fed officials have urged Congress and the Obama administration to relax standards for refinancing mortgages so more Americans can do so.
Obama announced such a policy — a large expansion of mortgage financings — Tuesday night in his State of the Union address, but the proposal requires congressional approval, which could prove difficult because of sharp partisan differences.
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