Fed Plans to Keep Rates Low 'At Least Through Mid-2013'

Published: Tuesday, 9 Aug 2011 | 4:05 PM ET 

By: CNBC.com with AP and Reuters

 

Joshua Roberts | Bloomberg | Getty Images

Fed Chairman Ben Bernanke

 

The Federal Reserve, acknowledging that the economy is much weaker than expected, hoped to reassure nervous markets Tuesday by saying it would keep interest rates exceptionally low "at least through mid-2013."

Stocks initially plunged following the Fed statement but then gyrated as investors tried to assess what such a long extension of low interest rates would mean. The market finally staged an explosive rally in the final hour as the Dow closed up Over 400 points.

Treasury bond prices also were volatile but finally ended higher. Gold soared further while the US dollar skidded.

The Fed previously had said that it would keep rates low for "an extended period." The more explicit time frame is aimed at calming investors by giving them a clearer picture of how long they will be able to obtain ultra-cheap credit. Rates have been near zero since December 2008.

Fed policymakers used significantly more downbeat language to describe current economic conditions. They said so far this year the economy has grown "considerably slower" than the Fed had expected.

They also said that temporary factors, such as high energy prices and the Japan crisis, only accounted for "some of the recent weakness" in economic activity.

Three officials, Richard Fisher of the Dallas Fed, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia, voted against the move.

"The committee currently anticipates that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013," the U.S. central bank said in a statement. 

Fed officials met against a backdrop of speculation that they would say or do something new to address a darkening economic picture.

The stock market has plunged and government data have signaled a weaker economy in the four weeks since Chairman Ben Bernanke told Congress that the Fed was ready to act if conditions worsened.

The economy grew at an annual rate of just 0.8 percent in the first six months of the year. Consumers have cut spending for the first time in 20 months.  Wages are barely rising. Manufacturing is growing only slightly. And service companies are expanding at the slowest pace in 17 months.

Employers hired more in July than during the previous two months. But the number of jobs added was far fewer than needed to significantly dent the unemployment rate, now at 9.1 percent. The rate has exceeded 9 percent in all but two months since the recession officially ended in June 2009.

Fear that another recession is unavoidable, along with worries that Europe may be unable to contain its debt crisis, has rattled stock markets.

The Dow Jones industrial average has lost nearly 15 percent of its value since July 21. On Monday, it fell 634 points—its worst day since 2008 and sixth-worst drop in history.

The tailspin on Wall Street was further fueled by Standard & Poor's decision to downgrade long-term U.S. debt.

Bernanke didn't speak publicly after Tuesday's Fed meeting.

The chairman this year made a historic change by scheduling news conferences after four of the Fed's eight policy meetings each year, but Tuesday's wasn't one of them.

Later this month at the Fed's annual retreat in Jackson Hole, Wyo., Bernanke will likely address the weakening economy, the S&P downgrade and the market turmoil.

Earlier this summer, the Fed ended a $600 billion Treasury bond-buying program. The bond purchases were intended to keep rates low to encourage spending and borrowing and lift stock prices.

 

Source: CNBC.com