Possible Low Rates for Sometime ?

S+P downgraded the U.S. from AAA to AA+ and now it gets worse. Yesterday Italy, England and Greece unfriended them on Facebook. Jay Leno

  • Fed to Hold Rates ‘Exceptionally Low’ Through Mid-2013

 

 

BINYAMIN APPELBAUM, On Tuesday August 9, 2011,

 

WASHINGTON — The Federal Reserve said Tuesday that it will hold short-term interest rates near zero through mid-2013 to support the faltering economy, but it announced no new measures to further reduce long-term interest rates or otherwise stimulate renewed growth.

 

The Fed’s policy-making board said in a statement that growth “has been considerably slower” than it had expected, and that it saw little prospect for rapid improvement, prompting the change in policy. It had previously said that it would maintain rates near zero “for an extended period.”

 

“The committee now expects a somewhat slower pace of recovery over the coming quarters,” the Fed’s statement said. “The unemployment rate will decline only gradually.”

 

Many economists and outside analysts argue that the Fed should act more aggressively in response to rising unemployment and faltering growth. But internal divisions are limiting the central bank’s ability to pursue additional steps.

 

Even the modest commitment announced Tuesday was passed only by a vote of 7 to 3. The central bank prefers to act unanimously whenever possible.

 

The dissenters included Richard W. Fisher, president of the Federal Reserve Bank of Dallas; Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis; and Charles Plosser, president of the Federal Reserve Bank of Philadelphia.

 

The three men regard inflation as a more serious threat to the economy than unemployment.

 

The Fed’s announcement was eagerly awaited by investors who have responded to grim economic tidings in recent weeks by driving down global markets.

 

The economy grew only 0.8 percent during the first half of the year. The work force is shrinking. State and local governments are cutting back. And fiscal policy is immobilized by partisanship, leading Standard & Poor’s to remove the United States from its list of risk-free borrowers.

 

That has left investors to hope that the Fed would consider new steps to help the economy.

 

The central bank has held its benchmark short-term interest rate near zero since December 2008, flooding the financial system with the nearest thing to free money. It has promised after each of its meetings since late 2008 to keep interest rates near zero “for an extended period,” which Mr. Bernanke defined earlier this year as meaning a period of at least several months.

 

The central bank also has amassed more than $2.5 trillion in Treasury securities and mortgage-backed securities, putting downward pressure on long-term interest rates. The purchases have pushed investors into the stock market and other riskier investments, and reduced the value of the dollar, helping American exporters. The Fed has said that selling off these assets would be its first step when the economy begins to improve, but it has avoided setting any timetable for a wind-down.

 

Mr. Bernanke said last month that the Fed was “prepared to take further steps if needed,” but he made clear that the central bank was reluctant to do so. He said the Fed would act only if growth continued to falter and, importantly, only if price increases slowed, stopped or reversed.

 

The inflation of prices and wages is the Fed’s primary concern. By law the Fed is responsible for keeping prices steady and unemployment as low as possible. But Mr. Bernanke, like his predecessors, places greater emphasis on prices, in part because the Fed has concluded that slow, steady inflation — about 2 percent a year — is the best atmosphere for enduring job growth.

 

The Fed projected in June that inflation could reach 2.5 percent this year, a key reason it has shown little interest in taking additional steps to help the 25 million Americans who can’t find full-time work.

 

There are signs that inflation is abating, as a temporary spike in commodity prices earlier this year works through the economy, and as growth weakens. But conservative members of the policy-making board remain focused on the risk that inflation will sneak up on the Fed.

 

The Fed’s policy-making committee next meets Sept. 20.http://ca.finance.yahoo.com/news/Fed-to-Hold-Rates-nytimes-656750399.html

 

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