Fed Says Rate Low ’til Late 2014

Central bank expects continued high unemployment, subdued inflation.

Federal Reserve officials said their benchmark interest rate will stay low until at least late 2014 and anticipate that unemployment will remain high and inflation “subdued.”

“The Committee expects to maintain a highly accommodative stance for monetary policy,” the Federal Open Market Committee said in a statement released in Washington today. “Economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

The Fed extended its previous pledge to keep rates low at least until the middle of 2013 as more than two years of economic growth have failed to push unemployment below 8.5 percent. Some Fed officials have said further easing might be needed to put more Americans back to work and revive the housing market.

Stocks erased losses and Treasuries extended gains after the statement. The Standard & Poor’s 500 Index was little changed at 1,314.72 at 12:49 p.m. in New York. The yield on the 10-year Treasury note fell to 1.97 percent from 2.06 percent late yesterday.

U.S. central bankers at 2 p.m. today will unveil their latest predictions for economic growth, inflation and unemployment for the next three years. They will also for the first time make public their forecasts for the benchmark lending rate. Chairman Ben S. Bernanke will follow that release with a press conference at 2:15 p.m. in Washington.

The Fed said it would continue to extend the average maturity of its $2.6 trillion securities portfolio, a move dubbed “Operation Twist.” The Fed also maintained its policy of reinvesting maturing housing debt into agency mortgage-backed securities.

“The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually,” the statement said. “The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee’s dual mandate.”

Richmond Federal Reserve Bank President Jeffrey Lacker dissented, and “preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate.”

“Rates are not going to go up anytime soon,” said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. “They don’t see a lot of inflation out there.”

Recent reports on manufacturing, housing and employment indicated that the economy was picking up speed as the new year began.

 

Adding Jobs

Employers added 200,000 jobs in December, twice the previous month’s pace, and the unemployment rate dropped to 8.5 percent from 8.7 percent the month before.

Household wealth is getting a boost from rising stock prices. The Standard and Poor’s 500 Index climbed 4.5 percent in 2012 through yesterday, the best start to the year since 1997, when it rallied 6.1 percent in the first 14 days.

Harley-Davidson Inc., the biggest U.S. motorcycle maker, reported $54.6 million income from continuing operations in the fourth quarter compared with a loss of $42.1 million a year earlier. Sales at the maker of Fat Boy and V-Rod motorcycles rose 12 percent in the U.S.

Investors are turning increasingly bullish on U.S. markets as they declare its economy in better health than major rivals from Europe to Asia, according to the Bloomberg Global Poll.

Forty-eight percent of respondents predict the U.S. will be among the world’s best-performing markets this year, according to the quarterly poll of 1,209 investors, analysts and traders who are Bloomberg subscribers that was conducted Jan. 23-24. That’s the highest rating for the U.S. since the poll began in 2009 and it’s more than twice that of Brazil and China, the second-ranked markets.

Private forecasters predict the U.S. economy will grow 2.3 percent this year, up from 1.8 percent in 2011, according to a median estimate in a Bloomberg survey from Jan. 6 to Jan. 11.

Fed officials are still concerned about the sustainability of consumer spending as savings rates fall and as disposable income adjusted for inflation shrinks, said Roberto Perli, managing director of policy research at International Strategy and Investment Group Inc. in Washington.

 

Europe Crisis

A deeper crisis in Europe is another cause for concern. The International Monetary Fund yesterday cut its forecast for global growth this year and said the euro crisis threatens to derail the world economy.

For the U.S., “the top risks are unemployment and Europe,” said Drew Matus, senior U.S. economist at UBS Securities LLC and a former New York Fed staff member.

UBS estimates that every 0.7 percentage point decline in euro-area growth cuts U.S. output by 0.3 point. The IMF yesterday forecast the 17-nation euro area would shrink 0.5 percent this year.

Google Inc., owner of the world’s most popular Internet search engine, last week reported fourth-quarter revenue and profit that missed analysts’ estimates as a slowdown in Europe crimped sales.

Some Fed officials have indicated that they remain open to more bond purchases to keep interest rates low and support growth.

Atlanta Fed President Dennis Lockhart told reporters Jan. 9 that he hadn’t closed out “the option” for more stimulus, while New York Fed President William C. Dudley said in a Jan. 6 speech that it’s “appropriate” to evaluate whether the Fed could do more to boost growth.

“Europe is the reason” Fed officials are considering buying more bonds to boost the economy, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

“You want to gain as much momentum as you can in case another storm hits,” Crandall said. “They are worried about the lack of a catalyst in the U.S. to get us to escape velocity” of self-sustaining growth.

The Fed’s $2.3 trillion of bond purchases in two rounds of so-called quantitative easing haven’t stoked inflation. A gauge of consumer prices tied to personal expenditures, excluding food and energy, rose 1.7 percent for the 12 months ending November.

 

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