The Federal Reserve Extends Its Low-Interest Policy Through 2014

By January 25, 2012Economy

The Federal Reserve Board’s Federal Open Market Committee (FOMC) is extending its policy of “exceptionally low” levels of interest through late 2014. Previous Fed statements – at least since August, when they originally started making this statement – had suggested that the federal funds rate would stay low through mid-2013. Aside from this, much of the statement was identical to its recent releases.

The extension of the time period through 2014 was met with a dissention from Richmond Federal Reserve Bank President Jeffrey Lacker, an inflation hawk and new member of the FOMC in 2012. Other new additions rotating on the FOMC this year include Dennis Lockhart (Atlanta), Sandra Pianalto (Cleveland) and John Williams (San Francisco). Each of them voted with the majority.

Regarding the economy, the Fed writes:

Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.

Again, much of this is a repeat of the December statement with some minor tweaks. Despite some improvements in the domestic economy, the Federal Reserve remains worried about Europe and the continuing drags from an elevated unemployment rate and still-depressed (but slowly progressing) housing market.

In addition to extending its time horizon, the Fed plans to continue rebalancing its portfolio toward holding more long-term securities (“Operation Twist”) and reinvesting principal payments in mortgage-backed securities. The intent of this policy is to push interest rates lower – particularly those impacting mortgages.

Chad Moutray is chief economist, National Association of Manufacturers.

Update: As part of the Ben Bernanke’s new communication strategy, the Fed has begun providing a more complete view of its economic assumptions and targets. According to its new release, the FOMC states that its interest rate target is 2 percent. By clearly stating this goal, it will allow the public to “keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum employment in the face of significant economic disturbances.”

Despite stating its target for interest rates, the Fed does not feel that it is appropriate to set a goal for employment. It determines that the longer-run normal rate of unemployment ranges between 5.2 and 6.0 percent, with the Fed’s ability to maximize employment more limited and constantly changing over time. 

In addition to this statement of targets, the Fed also released its economic projections over the coming years. Real GDP is expected to grow between 2.2 and 2.7 percent this year, which is slightly lower than its forecasts made in November.

The employment picture, though, improved from its earlier assessment, with the unemployment rate ranging from 8.2 to 8.5 percent. The November projection was between 8.5 and 8.7 percent. Note that the unemployment rate is still expected to fall very slowly, with the unemployment rate ranging from 6.7 to 7.6 percent in 2014, depending on the differing projections provided by various Fed officials.

Inflation is expected to range between 1.4 and 1.8 percent this year, an improvement from price increases experienced in 2011 and below the Fed’s key target of 2 percent.

Chad Moutray

Chad Moutray

Chad Moutray is chief economist for the National Association of Manufacturers (NAM), where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews. He has appeared on Bloomberg, CNBC, C-SPAN, Fox Business and Fox News, among other news outlets.
Chad Moutray

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