Fed says no rate hikes until at least late 2014

By msnbc.com news services

The U.S. Federal Reserve said Wednesday it will not raise interest rates until at least late 2014, even later than investors expected, in an effort to support a sluggish economic recovery.

Without making major shifts to its outlook for the economy, the central bank described the unemployment rate as still elevated and said it expects inflation to remain at levels consistent with stable prices.

During a press conference Wednesday afternoon, Fed Chairman Ben Bernanke said the 2014 forecast is simply the Fed?s ?best guess.?

Bernanke said the central bank?s ability to forecast that far out is limited, and that the Fed could adjust the time frame if economic conditions change. Still, he added, all signs suggest the Fed won?t change its record-low rate for nearly three years.

?Unless there is a substantial strengthening of the economy in the near term, it's a pretty good guess we will be keeping rates low for some time,? Bernanke said.

The central bank has kept its key rate at a record low near zero for about three years.

In a statement following a two-day meeting, the Fed depicted business investment as having slowed, downgrading its assessment from the December meeting.

Economic conditions "are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014," the central bank said in its statement.

Richmond Fed President Jeffrey Lacker, an inflation hawk who rotated into a voting seat this year, dissented against the decision. He preferred to omit the description of the time period for ultra-low rates.

If the Fed can convince financial markets it will be on hold longer than they had anticipated, long-term interest rates could drop as investors price in the new information.

"A significant contingent of the committee views this exercise not so much as a process improvement but more as an opportunity to ease again via the forward rate communications channel," Stephen Stanley, an economist at Pierpoint Securities, said ahead of the Fed's announcement.

Separately, the Fed cut its outlook for economic growth in 2012, but was more optimistic about the unemployment rate. It also took the historic step of setting an inflation target, of 2 percent, a victory for Chairman Ben Bernanke that brings the Fed in line with many of the world's other major central banks.

While forecasters expect the U.S. economy grew at a 3 percent annual rate in the last three months of 2011, they look for growth of just around 2 percent this year.

Fed officials appear likely to bide their time in determining whether more monetary stimulus is needed. Many economists expect they will eventually decide on another spurt of Fed bond buying?-- probably one focused on mortgage debt.

In response to the deepest recession in generations, the Fed slashed the overnight federal funds rate to near zero in December 2008. It has also more than tripled the size of its balance sheet to around $2.9 trillion through two separate bond purchase programs.

The policy is credited with having prevented an even more devastating downturn, but it has been insufficient to bring unemployment down to levels considered normal during good economic times.

In December, the U.S. jobless rate stood at 8.5 percent, and some 13 million Americans were still actively looking for work but could not find it.

Reuters contributed to this report.

Related:

Here's what the Fed's 'new transparency' looks like

Fed?s Open Market Committee getting a lot more open

Source: http://bottomline.msnbc.msn.com/_news/2012/01/25/10234720-fed-says-no-rate-hikes-until-at-least-late-2014

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