Fed expects low rates through 2014

The Federal Reserve said on Wednesday that it intended to hold short-term interest rates near zero “at least through late 2014,” extending its most basic and longest-running response to the financial crisis by at least another 18 months.
The decision means that the Fed does not expect the economy to complete its recovery from the 2008 crisis over the next three years. By holding rates near zero, the Fed hopes to hasten that process somewhat by reducing the cost of borrowing.

“While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated,” the Fed said in a statement released after a two-day meeting of its policy-making committee. “Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed.”

The Fed planned to release later Wednesday afternoon its quarterly economic forecast, which will include for the first time the much-anticipated predictions of the 17 members of the committee about when they do intend to end the Fed’s three-year-old policy of holding short-term interest rates near zero. Those predictions could extend the horizon for near-zero interest rates even further into the future.

After the release of those predictions, Ben S. Bernanke, the Fed chairman, will hold a news conference. 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, and Mr. Bernanke has long advocated clarity and transparency as basic tools of monetary policy.

Under Mr. Bernanke, the Fed already has started to publish more frequent forecasts of other economic data, including the pace of growth, inflation and unemployment. Last year, Mr. Bernanke began to hold regular news conferences; he is scheduled to answer media questions four times this year, after every other meeting of the policy-making committee. And the Fed increasingly has offered guidance about its own future decisions, in particular gradually extending the period over which it intends to hold rates near zero.

Since the beginning of the financial crisis in 2007, the Fed has alternated bursts of activity with periods of rest to judge whether it has, at last, done enough to revive the economy. The Fed announced this summer that the central bank intended to keep interest rates near zero through at least the middle of 2013, and that it would seek to reduce long-term interest rates through changes in the kinds of investments that it held in its nearly $3 trillion portfolio. Since then, two meetings have passed without the introduction of any new programs.

Economic activity continues to expand slowly. Both the World Bank and the International Monetary Fund recently estimated that the United States would achieve growth of about 2 percent in 2012, in line with the estimates of many private forecasters. The Fed’s most recent forecast, released in October, was more optimistic, projecting growth of 2.9 percent in 2012.

The pace of growth is not fast enough to significantly reduce the number of people who need work. Almost 24 million Americans could not find full-time jobs in December. A major reason that the official unemployment rate has declined in recent months is that many people have stopped looking for work.

And the housing market remains in a deep depression. Construction of new homes fell to the lowest level on record in 2011, and sales of existing homes were equally scarce despite the availability of mortgage loans at the lowest interest rates on record. Millions of homeowners continue to face foreclosure.

Some Fed officials have suggested that the Fed should buy mortgage-backed securities, as it did in 2009, to reduce interest rates on mortgage loans further. Such a program also could reduce interest rates on other kinds of loans, like corporate borrowing. Officials say the possibility of new asset purchases remains under consideration.

The decision to forecast that interest rates will remain low at least until late 2014 was supported by nine members of the committee. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented.