The Federal Reserve signaled Wednesday that a full economic recovery could take “nearly three more years,” and it went further than ever to assure consumers and businesses that they will be able to borrow cheaply well into the future.
The central bank said it would probably not increase its benchmark interest rate until late 2014 at the earliest – a year and a half later than it had previously said.
Some economists said the new late-2014 target might foreshadow further Fed action to try to “invigorate the economy.”
Julie Coronado, an economist at BNP Paribas, said she thought the Fed was indicating that it will step up its purchases of bonds and other assets if economic growth fails to accelerate — even if it doesn’t slow.
That is a “very low bar indeed,” she wrote in a note to clients.
Other analysts fear that the Fed’s longer-term timetable for a rate increase could hamstring it, even though Bernanke stressed the Fed’s ability to adjust rates “as it sees fit.”
Dana Saporta, an economist at Credit Suisse, worried that the much-longer timetable would compromise the Fed’s credibility if it must raise rates sooner because of unexpectedly strong growth and inflation.
“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 new timetable showed the Fed is concerned, if not surprised, that the recovery remains “stubbornly slow.” However, the Fed also thinks inflation will stay tame enough for rates to remain at record lows without igniting price increases.
Chairman Ben Bernanke cautioned that late 2014 is merely its “best guess.” The Fed can shift that plan if the economic picture changes. But he cast doubt on whether that would be necessary.
“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,” he said.
The bank’s tepid outlook suggests it’s prepared to do more to “help” the economy. One possibility is a third bond-buying program that will supposedly drive down rates on mortgages and other loans in an effort to convince consumers and businesses to borrow and spend more.
In a statement after a two-day policy meeting, the Fed said it stands ready to adjust its “holdings as appropriate to promote a stronger economic recovery in the context of price stability.”
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 central bank slightly reduced its outlook for growth this year, from as much as 2.9 percent forecast in November down to 2.7 percent. For the first time, the Fed provided an official target for inflation – 2 percent – in a statement of its long-term policy goals.
The bank 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.
One does not need to be a rocket scientist to grasp the fudging the BLS has been doing every month for years now in order to bring the unemployment rate lower: the BLS constantly lowers the labor force participation rate as more and more people “drop out” of the labor force for one reason or another. While there is some floating speculation that this is due to early retirement, this is completely counterfactual when one also considers the overall rise in the general civilian non institutional population.
…we are redoing an analysis we did first back in August 2010, which shows what the real unemployment rate would be using a realistic labor force participation rate…
It won’t surprise anyone that as of December, the real implied unemployment rate was 11.4% – basically where it has been ever since 2009…
Bernanke noted that the Fed expects only moderate growth over the next year. He pointed to the persistently depressed housing market and continued tight credit for many consumers and companies.
The Fed described inflation as “subdued,” a more encouraging assessment than last month.
“This is a fairly clear-cut signal that inflation is not on their radar at this point,” Tom Porcelli, an economist at RBC Capital Markets, wrote in a research note.
The Associated Press contributed to this report.