Dee DePass has been a Star Tribune business reporter since 1993, covering small business, financial institutions, manufacturing and, most recently, the economy. Originally from New York, Dee came to Minnesota after earning her master's in journalism at the University of Maryland and her undergraduate degree at Vassar College.

Fed to hold off raising interest rates until 2014

Posted by: Dee DePass Updated: January 25, 2012 - 6:10 PM

The Federal Reserve Board of Governors voted 9-1 this week to keep key interest rates the same until late 2014.

The measure is expected to keep interest rates at historically low levels in an effort to help the slow-growing U.S. economy. If successful, the effort could spur business loans, hiring and consumer spending, economists said.

Fed officials issued a statement about its decision Wednesday after a two-day policy meeting. The Fed committee decided that the key "federal funds rate" should stay in the range of zero to 0.25 percent until late 2014.

Upon hearing the news, the stock market reacted swiftly early Wednesday. The Dow Jones Industrial Average initially rose  0.36 percent, the S&P 500 rose 0.57 percent and NASDAQ rose 1.04 percent.

Economists noted that the Fed's decision to hold rates steady signals that the Fed is more concerned with stimulating the economy than curtailing inflation. They noted that concerns about Europe's debt crisis and slowing growth in Asia could hamper growth in the United States and slow consumer spending later in the year. Keeping interest rates low could combat any fallout from shifts overseas. 

During an unusual press conference held late Wednesday, Fed President Ben Bernanke unveiled a new inflation price target of 2 percent for the nation. He noted that any goal above 2 percent could impair the public's financial decision making abilities, while a lower inflation goal could cause price deceleration, which is hard to control. 

"Clearly articulating to the public this 2 percent goal for inflation over the long term should help foster price stability and moderate long term interest rates and will enhance the committee's ability to promote maximum employment in the face of significant economic disturbances," Bernanke said. "Under present circumstances in which the unemployment rate is elevated and the inflation outlook is subdued, the committee judges that sustaining a highly accommodative stance of monetary policy is consistent with promoting both objectives."

Bernanke said the Fed committee was adopting a more open posture to the public in the hopes of stabilizing the economy.

The Fed decisions generally received a positive response from investors and economists. The Dow Jones Industrial Average finished up Wednesday by 81.21 to close at 12,756.96. 

Ryan Sweet, a senior economist at Moody’s Analytics, issued the following commentary about the Fed's actions:

Fed moves to boost U.S. recovery
Ryan Sweet, Senior Economist, Moody’s Analytics

The Fed’s decision to keep interest rates near zero until at least 2014 should provide a boost to growth. The change will help manage market expectations. In theory, lower interest rates can boost mortgage refinancing, lift equity prices, and increase business investment while supporting vehicle and home sales. But interest rates are already very low; the 10-year Treasury fell below 2% after the Federal Open Market Committee (FOMC) statement.

This will help, but it doesn’t appreciably alter our forecast for real GDP growth to increase 2.6% this year.

The Fed telegraphed that it was going to become more transparent, yet, the FOMC statement creates more questions than it answers. Extending the central bank’s commitment to low rates through 2014 is a form of monetary easing when the nominal target rate cannot go any lower. This is aggressive, particularly as the tone of the economic data has improved.

 

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