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Fed unlikely to raise rates until at least 2014

By Martin Crutsinger

Associated Press

Published: Wednesday, Jan. 25 2012 10:30 p.m. MST

The motorcade waits outside the White House to take President Barack Obama to the U.S. Capitol for the State of the Union address in Washington, on Tuesday, Jan. 24, 2012. (AP Photo/Jacquelyn Martin)

Associated Press

WASHINGTON — The Federal Reserve went further than ever Wednesday to assure consumers and businesses that they'll be able to borrow cheaply well into the future.

The Fed pushed back the date for any likely increase in its benchmark interest rate by at least a year and a half, until late 2014 at the earliest.

Its new timetable showed the Fed is concerned that the economy's recovery remains stubbornly slow. But it also thinks inflation will stay tame enough for rates to remain at record lows without igniting price increases.

Chairman Ben Bernanke cautioned that the Fed's late-2014 horizon for any rate increase is merely its "best guess." It has the flexibility to shift its timetable if the economic picture changes. But speaking at a news conference later, Bernanke said:

"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."

The Fed's tepid outlook also suggests it's prepared to do more to help the economy. One possibility is a third bond-buying program. The idea would be to further drive down rates on mortgages and other loans to embolden consumers and businesses to borrow and spend more.

In a statement after a two-day policy meeting, the Fed held out the possibility of taking such action later. It said it's ready to adjust its "holdings as appropriate to promote a stronger economic recovery in the context of price stability."

Treasury yields fell after the Fed made its announcement around 12:30 p.m. EST. But yields stopped falling after the Fed later issued forecasts for the economy and interest rates. They showed that while some members foresee super-low rates beyond 2014, six of the 17 members forecast a rate increase as early as this year or next.

It was the first time the Fed had released interest-rate forecasts from its committee members. It will now do so four times a year, when it also updates its economic outlook.

The rate forecasts are an effort to provide more explicit clues about the Fed's plans. They also coincide with a broader Fed effort to make its communications with the public more open.

Lower yields on bonds tend to encourage investors to shift money into stocks, which can boost wealth and spur more spending.

Stocks, which had traded lower before the Fed's announcement, quickly recovered their losses. The Dow Jones industrial average, down about 60 points before the announcement, closed up 83 points.

Though Bernanke stressed the Fed's ability to adjust rates as its outlook shifts, some analysts expressed concern.

Dana Saporta, an economist at Credit Suisse, said the now-much-longer timetable for a likely rate increase could compromise the Fed's credibility if it must raise rates before late 2014. Unexpectedly strong growth and inflation could force such an increase.

"It's striking that the Fed would make an implicit commitment for almost three years," Saporta said. "It seems like an awfully long time to make such a statement. Given that no one knows what will happen ... the (Fed) may eventually regret this."

The Fed slightly reduced its outlook for growth this year. It thinks the economy will grow up to 2.7 percent this year. That's down from its November's forecast of up to 2.9 percent.

But it sees unemployment falling as low as 8.2 percent this year, better than its earlier forecast of 8.5 percent. December's unemployment rate was 8.5 percent.

For the first time, the Fed provided an official target for inflation — 2 percent — in a statement of its long-term policy goals. It didn't set a target for unemployment. But it said unemployment between of 5.2 percent and 6 percent would be consistent with a healthy economy.

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