Fed to Keep Interest Rates Near Zero for Next 2 Years

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Federal reserve buildingThe Federal Reserve sketched a dim outlook for the economy Tuesday, suggesting it will remain weak for two more years. As a result, the Fed said it expects to keep its key interest rate near zero through mid-2013.

It's the first time the Fed has pegged its "exceptionally low" rates to a specific date. The Fed had previously said only that it would keep its key rate at record lows for "an extended period."

The Fed's synopsis and its implications for the economy led to a wild afternoon of trading on Wall Street. Stocks plunged after the statement was released, but then shot up shortly after. The Dow Jones industrial average sank more than 176 points, then recovered its losses and closed up 429 points for the day.

Many investors sought the safety of long-term Treasurys. The yield on the 10-year Treasury note touched 2.03 percent - a record low.

The two-year time frame for any rate increase underscored a stark reality: A sluggish economy and painfully high unemployment have become chronic.

"The tone of the Fed's statement is very downbeat. They are very nervous about the economy," said Mark Zandi, chief economist at Moody's Analytics. "This is unprecedented for the Fed to indicate they are ready to keep rates low for two more years."

Not all were impressed. University of Oregon economist Timothy Duy called the move "weak medicine."

Duy said he wanted to see the Fed commit to buying more Treasury bonds. 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.

The Fed did hold out the promise of further help down the road but did not spell out what else it might do.

The central bank's decision was approved on a 7-3 vote with three Fed regional bank presidents who have been worried about inflation objecting. It was the first time since November 1992 that as many as three Fed members have dissented from a policy statement.

Dean Maki, chief U.S. economist at Barclays Capital, said the large number of dissents suggests that Bernanke would have trouble building consensus for another round of bond purchases.

"Nothing here says they're not going to do (it)," Maki said. But "it does suggest that there is significant resistance on the committee."

The Fed used significantly more downbeat language to describe current economic conditions. It said so far this year the economy has grown "considerably slower" than the Fed had expected and consumer spending "has flattened out." It 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.

The more explicit time frame on the Fed's key interest rate is aimed at calming nervous investors. It offered them a clearer picture of how long they will be able to obtain ultra-cheap credit, and it was at least a year longer than many economists had expected.

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.

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williambeasy

No increase in interest rates for two years? Uh huh. But we'll still love you in the morning.

August 11 2011 at 7:57 AM Report abuse rate up rate down Reply
Darrell & Donna

Do away with the feds;;Look what Greenspan and Bernanke have managed to do with the econony in the past 20 years;;Let the real hard working citzens run their business and get the feds out of trying to manage the private businesses;;We dont need the feds ;;Are you better off now than you werre 10 years ago???

August 10 2011 at 8:28 PM Report abuse rate up rate down Reply
kernershort

So Uncle Ben says that he will keep interest rates low for another two years and the stock market dives another 500 points. I wonder why? Could it be that despite the fact that we have already had ultra low interest rates for two years without any benefit to the economy. So, if something doesn't work, keep doing it! Uncle Ben says he wants more inflation. The inflation that I see in the supermarket every day isn't enough for him. Everything is UP, including my buttered roll and coffee in the morning. Electricity, water charges, subways, buses, tolls, real estate taxes all UP, UP and UP. But Uncle Ben says we need more inflation. I guess our salaries, pensions, social security and savings haven't been eroded enough. Who exactly was it that gave this master counterfeiter the authority to rob all of us of our savings and purchasing power and transfer hundreds of billions to the banks?

August 10 2011 at 5:30 PM Report abuse +1 rate up rate down Reply
guyfromqueens

I think the financial institutions, WHO KNEW EXACTLY WHAT THEY WERE DOING WHEN THEY CREATED THE RECESSION WE HAVE BEEN IN, should bail out the United States of the national debt as well as all students of the student loans they very cleverly encouraged them to obtain.

August 10 2011 at 5:12 PM Report abuse rate up rate down Reply
1 reply to guyfromqueens's comment
crimeslawyer

If these students are that stupid they shouldn't go to college anyway.

August 10 2011 at 5:59 PM Report abuse +1 rate up rate down Reply
akrzyston

While it may seem an over simplification, the fact is that the government and business leaders have for decades ignored this core problem. Instead of focusing on growing personal incomes, leaders have engaged in endless debate over the efficacy of various government programs while continuing to fund a myriad of overlapping government subsidies by borrowing ever more money. Meanwhile Real Earned Incomes have declined.

The Real Earned Income per Adult has decreased by -8% from $29,370 in 2000 to $27,020 in 2009. The Median (typical) Household Income decrease by over -5% during the same time period (source US Census). This decline is unprecedented since the Great Depression.

August 10 2011 at 4:42 PM Report abuse rate up rate down Reply
akrzyston

While it may seem an over simplification, the fact is that the government and business leaders have for decades ignored this core problem. Instead of focusing on growing personal incomes, leaders have engaged in endless debate over the efficacy of various government programs while continuing to fund a myriad of overlapping government subsidies by borrowing ever more money. Meanwhile Real Earned Incomes have declined.

The Real Earned Income per Adult has decreased by -8% from $29,370 in 2000 to $27,020 in 2009. The Median (typical) Household Income decrease by over -5% during the same time period (source US Census). This decline is unprecedented since the Great Depression. Alex Krzyston

August 10 2011 at 4:42 PM Report abuse rate up rate down Reply
SPQR

Where did the money go? I didn't get it. We could be in for the big one here. There would be no help at all from anyone. How could the world be broke? ohh....we got robbed! Obama had a chance to fix the stock market and he didn't. SO the big piles of money are buying bonds? forcing the price of gold up! Looks like they will force the price of oil back up too.
If Americans were unwilling to spend before ...guess what....now there will be no spending at all now. I smell a revolution too..and it stinks. Next step is stop paying taxes of course if you had any money left the banks will steal that too. This time it won't be the kids in the streets taking tvs. It will be the old people who are armed to the teeth taking to the streets. S**t and I just wanted to go fishing.

August 10 2011 at 4:25 PM Report abuse rate up rate down Reply
kolblh

Raise the freaking interest rate, it's not working by keeping it low. More people suffer in earnings than profit. Bernanke
couldn't run a pop corn machine in a movie lobby. What happens when the approval rating of the govenment hits zero?
I smell a revolution. This is one old mans oppinion.

August 10 2011 at 1:54 PM Report abuse +1 rate up rate down Reply
1 reply to kolblh's comment
louiethesyrian77

Bernanke has a better skill set for slicing brisket in a delicatessen somewhere, hopefully not in the U.S.

August 10 2011 at 2:34 PM Report abuse rate up rate down Reply
silas

AOL down 26%---nice job Huffington. Get it through your thick skulls-Liberalism does not work and does not sell, PERIOD.

August 10 2011 at 1:30 PM Report abuse -1 rate up rate down Reply
dogcplayers

Firstly, the Federal Reserve is not permitted to make loans to the US Government. It is a violation of the Federal Reserve Act.

What happens is the Federal Reserve purchases US Government securities from banks. The Fed then uses the interest payments on those government securities to fund their operations. Any dollar-amount in excess of their operating costs is returned to the Treasury.

Recently, however, the Federal Reserve has been violating the Federal Reserve Act -- a de facto violation, but a violation nonetheless. The term for the violation is "printing money."

An act of printing money is the Federal Reserve purchasing securities directly from the US Treasury. The Federal Reserve Act strictly forbids this, stating the Fed can purchase US Government debt but "only in the open market."

A nation just can not have its central bank funding the political administration in power; and the Treasury is definitely part of the Administration. The central bank is supposed to be independent of the political apparatus. Yet, it has not been politically independent for a long while. (See the research of the late Professor Thomas Havrilesky of Duke University.)

What the Fed has done to circumvent the law is obvious to anyone who cares to see. Banks, as usual, have been purchasing debt from the Treasury; yet, in a matter of only days, the Fed is buying those exact same securities (same cusip numbers) from the banks. This is no different than buying straight from the Treasury. Hence, the de facto violation of printing money.

August 10 2011 at 12:42 PM Report abuse +2 rate up rate down Reply
1 reply to dogcplayers's comment
kernershort

You're right, the Federal Reserve is doing something that it should not do. Buying the government debt is tantamount to the government borrowing from itself. How can it do that? By the equivalent of printing money. This can only lead to more inflation, inspite of the fact that Uncle Ben says there is no inflation. He is lying and counterfeiting money by the hundreds of billions! This is a criminal act, and Ben Bernanke should be removed from office and indicted.

August 10 2011 at 5:04 PM Report abuse rate up rate down Reply