This is not your parents' Federal Reserve

Whether one likes it or not, this Federal Reserve, under the direction of Chairman Ben Bernanke, has not exactly been shy in turning traditional Fed actions on their collective head. Another major development occurred on Jan. 25.

The Federal Reserve — now in its 99th year of existence as this nation’s central bank — has traditionally tried to keep financial market players and investors in the dark as to future policy moves. As a result, major financial institutions for years employed highly compensated “Fed watchers” to decipher every word, every nuance, of Fed statements to gain an advantage regarding the Fed’s next monetary policy move.

Needless to say, those positions no longer have value.

Note that the Fed had reduced its key short-term interest rate (the federal funds rate) — and the most important of all short-term interest rates — to an all-time low target range of 0.00 percent to 0.25 percent in December 2008, more than three years ago. The Fed had suggested in 2009 and 2010 that it was in no particular hurry to push that rate higher.

Last August, the Fed then took the unprecedented step of indicating that the rate would stay where it was “until at least mid-2013” — unlike any statement the Fed had ever made before. The Fed’s intent was to allow businesses and consumers to have some clarity or relative certainty that new loans or new borrowings could be undertaken with limited upside interest rate risks.

That was then, this is now

The Fed’s Open Market Committee (known affectionately as the FOMC) took that one better on Jan. 25 with a statement that the federal funds rate would stay at its current historic low level “through at least late 2014.” Another 18 months of incredibly low interest rate stability seems in store for the U.S. economy.

Note that this is a most likely scenario. Between you and me, the Fed would love to see stronger-than-expected U.S. economic performance this year and next year and the following year, perhaps mandating a move to push its key rate higher sooner rather than later.

A GDP forecast

In reality, the Fed’s willingness to keep its key rate so low for so long is a recognition that the modest U.S. economic growth of 2010 and 2011 is likely to continue. The Fed’s Jan. 25 forecast of 2.2 percent to 2.7 percent real (after inflation) U.S. economic growth this year is down from a forecast of 2.5 percent to 2.9 percent growth made last November.