Fed Unlikely to Raise Rates Until at Least 2014

Fed unlikely to raise rates until at leasat 2014WASHINGTON (AP) - The Federal Reserve went further than ever Wednesday to assure consumers and businesses that they'll be able to borrow cheaply well into the future.

The Fed pushed back the date for any likely increase in its benchmark interest rate by at least a year and a half, until late 2014 at the earliest. It said record-low rates are still needed to help boost an improving but still sluggish economy.

Treasury yields fell on the news. The yield on the five-year Treasury hit an all-time low of 0.76 percent. The yield on the 10-year note sank to 1.95 percent. The 10-year yield had been 2.02 percent just before the Fed made its announcement around 12:30 p.m. EST.

Lower yields could help further reduce mortgage rates and possibly boost stock prices as investors shift out of lower-yielding Treasurys.

Stocks, which had traded lower all day, quickly recovered their losses. The Dow Jones industrial average, which had been down about 60 points before the announcement, was up 54 points an hour after the Fed's announcement.

The central bank said in a statement after a two-day policy meeting that the economy is growing moderately, despite some slowing in global growth. It held off on any further bond-buying programs to try to increase growth.

The Fed announced no further bond buying efforts. But it held out the possibility of doing so later. It said it was prepared to adjust its "holdings as appropriate to promote a stronger economic recovery in the context of price stability."

Some economists say that means the Fed will take further action soon.

Julie Coronado, an economist at BNP Paribas, said the Fed is signaling it will boost its purchases of bonds and other assets if growth fails to accelerate, even if the economy doesn't slow.

That is a "very low bar indeed," she wrote in a note to clients.

The Fed described inflation as "subdued." That was a more encouraging description than it offered last month. A more positive outlook on prices gives the Fed more room to keep rates low.

"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 Fed's statement was approved on a 9-1 vote. Jeffrey Lacker, president of the Richmond regional Fed bank, dissented. He objected to the new time frame for a rate increase.

The extended time frame is a shift from the Fed's previous plan to keep the rate low at least until mid-2013. Some economists said the new late-2014 target could lead to further Fed action to try to invigorate the economy.

Chairman Ben Bernanke will discuss the updated economic forecasts and Fed policy at a news conference later.

The central bank has kept its key rate at a record low near zero for about three years. Its new time frame suggests the rate will stay there for roughly an additional three years.

Beyond the adjusted outlook for interest rates, Wednesday's statement closely tracked the Fed's previous comments about economic conditions.

The Fed used the same language as before in describing Europe's debt problems and the impact on the world economy.

The economy is looking a little better, according to recent private and government data. Companies are hiring more, the stock market is rising, factories are busy and more people are buying cars. Even the home market is showing slight gains after three dismal years

Still, the threat of a recession in Europe is likely to drag on the global economy. And another year of weak wage gains in the United States could force consumers to pull back on spending, which would slow growth.

The Fed has taken previous steps to strengthen the economy, including purchases of $2 trillion in government bonds and mortgage-backed securities to try to cut long-term rates and ease borrowing costs.


The idea behind the Fed's two rounds of bond buying was to drive down rates to embolden consumers and businesses to borrow and spend more. Lower yields on bonds also encourage investors to shift money into stocks, which can boost wealth and spur more spending.

Some Fed officials have resisted further bond buying for fear it would raise the risk of high inflation later. And many doubt it would help much since Treasury yields are already near historic lows. But Bernanke and other members have left the door open to further action if they think the economy needs it.

The Fed said it would keep its holdings of Treasury securities and mortgage-backed bonds at record levels and continue a program to further drive long-term rates lower by selling shorter-term securities and buying longer-term bonds.

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Mike

The Iraq war provides a good example. Until November 2000, no OPEC country had dared to violate the US dollar-pricing rule, and while the US dollar remained the strongest currency in the world there was also little reason to challenge the system. But in late 2000, France and a few other EU members convinced Saddam Hussein to defy the petrodollar process and sell Iraq's oil for food in euros, not dollars. In the time between then and the March 2003 American invasion of Iraq, several other nations hinted at their interest in non-US dollar oil trading, including Russia, Iran, Indonesia, and even Venezuela. In April 2002, Iranian OPEC representative Javad Yarjani was invited to Spain by the EU to deliver a detailed analysis of how OPEC might at some point sell its oil to the EU for euros, not dollars.

This movement, founded in Iraq, was starting to threaten the dominance of the US dollar as the global reserve currency and petro currency. In March 2003, the US invaded Iraq, ending the oil-for-food program and its euro payment program.
There are many other historic examples of the US stepping in to halt a movement away from the petrodollar system, often in covert ways. In February 2011 Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), called for a new world currency to challenge the dominance of the US dollar. Three months later a maid at the Sofitel New York Hotel alleged that Strauss-Kahn sexually assaulted her. Strauss-Kahn was forced out of his role at the IMF within weeks; he has since been cleared of any wrongdoing.

War and insidious interventions of this sort may be costly, but the costs of not protecting the petrodollar system would be far higher. If euros, yen, renminbi, rubles, or for that matter straight gold, were generally accepted for oil, the US dollar would quickly become irrelevant, rendering the currency almost worthless. As the rest of the world realizes that there are other options besides the US dollar for global transactions, the US is facing a very significant - and very messy - transition in the global oil machine.
GOT GOLD?

January 29 2012 at 5:57 PM Report abuse rate up rate down Reply
Mike

The "petrodollar" system was a brilliant political and economic move. It forced the world's oil money to flow through the US Federal Reserve, creating ever-growing international demand for both US dollars and US debt. The petrodollar system spread beyond oil: the majority of international trade is done in US dollars. That means that from Russia to China, Brazil to South Korea, every country aims to maximize the US-dollar surplus garnered from its export trade to buy oil.

As oil usage increased in the 1980s, demand for the US dollar rose with it, lifting the US economy to new heights. But even without economic success at home the US dollar would have soared, because the petrodollar system created consistent international demand for US dollars, which in turn gained in value. A strong US dollar allowed Americans to buy imported goods at a massive discount - the petrodollar system essentially creating a subsidy for US consumers at the expense of the rest of the world. Here, finally, the US hit on a downside: The availability of cheap imports hit the US manufacturing industry hard, and the disappearance of manufacturing jobs remains one of the biggest challenges in resurrecting the US economy today.

There is another downside, a potential threat now lurking in the shadows. The value of the US dollar is determined in large part by the fact that oil is sold in US dollars. If that trade shifts to a different currency, countries around the world won't need all their US money. The resulting sell-off of US dollars would weaken the currency dramatic?ally.
GOT GOLD ?

January 27 2012 at 5:40 PM Report abuse +1 rate up rate down Reply
Mike

Tehran Pushes to Ditch the US Dollar

India and Iran are negotiating deal to trade oil for gold. Does this matter, you ask? It strikes at both the value of the US dollar and today's high-tension standoff with Iran.

Officially the US & EU is Tehran must be punished for efforts to develop a nuclear weapon. Sanctions on Iran's oil exports meant to isolate Iran and depress the value of its currency to a point that the country crumbles.

Sanctions will not achieve their goals. Iran is far from isolated and its friends - like India - will stand by the oil-producing nation until the US backs down or acknowledges the real matter the American dollar as the global reserve currency.

In the 1970s a deal cemented the US dollar as the only currency to buy and sell crude oil, and from that monopoly on oil trade with the US dollar as the reserve currency for global trades in most commodities and goods. Massive demand for US dollars ensued, pushing the dollar's value up. Countries stored their excess US dollars savings in US Treasuries, giving the US government a vast pool of credit.

If the US dollar loses its position as the global reserve currency, the consequences for America are dire. The dollar's valuation stems from its lock on the oil industry - if that monopoly fades, so too will the value of the dollar. Global fiat currency relationships will change. Gold will rise. Uncertainty around paper money always bodes well for gold, and these are uncertain days indeed.

GOT GOLD?

January 27 2012 at 10:34 AM Report abuse rate up rate down Reply
Samir semaan

What the Feds are saying that the economy is growing slowly and that what I said in my blog and I mention financials can withstand any test in the market or global ecd the lacking onomy and manufacturers are doing well for the first time and the lacking one is housing and commercial businesses so what is the solution there must be a way to build revenues and to save money on the budget and save 52 days on the federal workforce and raise the retirement age to 70 years and let enforcement for these programs take place and and for social programs that can save 4 thrillon dollars only and can raise the revenues and pay down little by little the deficit.

January 26 2012 at 10:49 PM Report abuse -1 rate up rate down Reply
waldoknowswhere

O'Blabber likes the Beatles. While he plays the song "Taxman" throughout the halls of Capitol Hill, he should also be playing behind that "I'M a loser" . Have Sir Paul McCartny come back to a white house party and play it for him and his Loser kind. U suck O'Blabber and have buried our country in more red tape and debt., please go back to Kenya VIA Chicago Airport.

January 26 2012 at 6:27 PM Report abuse +2 rate up rate down Reply
simpsongrsm

Obama is "Drooling at the thought of more QE" and his puppet Bernanke will oblige him - aiding his ambitions for a second term! 2.4 Trillion already and perhaps another 1 Trillion on the way! And nobody - I MEAN NOBODY - is talking about the 800lb. Gorilla in the room - the "Derivative Mess." Most American's are blissfully ignorant regarding the fate of our economic system - willing to believe the lies coming from the Obama administration. The mere fact this boob Obama was elected to the highest office in the land is testiment to the utter stupidity of the American voter!

January 26 2012 at 2:32 PM Report abuse +2 rate up rate down Reply
cpo1514

And China will still be our largest lender.... right Barry??? On another note... Barry... what are your plans for january 2013??/ Ever thought of being a spokesman for the National Bank of China??/ A UAW (u aint workin) organizer???

January 26 2012 at 11:54 AM Report abuse +3 rate up rate down Reply
bkable

Looks a lot like a list of the banks that Ben Bernanke has focused on bailing out/ backstopping/ funneling cash since the Financial Crisis began, doesn’t it? When you consider the insane level of risk exposure here, you can see why the TRILLIONS he’s funneled into these institutions has failed to bring them even to pre-Lehman bankruptcy levels.

January 26 2012 at 11:09 AM Report abuse -1 rate up rate down Reply
bkable

Again from "Seeking Alpha":

We’ve been over the numerous BS excuses that US Dollar destroyer extraordinaire Ben Bernanke has made for QE enough times that today I’d rather simply focus on the REAL reason he continues to funnel TRILLIONS of Dollars into the Wall Street Banks.

I’ve written this analysis before. But given the enormity of what it entails, it’s worth repeating. The following paragraphs are the REAL reason Bernanke does what he does no matter what any other media outlet, book, investment expert, or guru tell you.

Bernanke is printing money and funneling it into the Wall Street banks for one reason and one reason only. That reason is: DERIVATIVES.

According to the Office of the Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activities for the Second Quarter 2010 (most recent), the notional value of derivatives held by U.S. commercial banks is around $223.4 TRILLION.

Five banks account for 95% of this. Can you guess which five?

January 26 2012 at 11:07 AM Report abuse -1 rate up rate down Reply
donut999

Wow, what an amazing news flash. Anybody understand why? Housing ala low mortgages is a big part of it, but the even bigger issue is to allow banks to "earn" their way out of the dire straits they are in. After 3-4 years of this, some light at the end of the tunnel. With another 3 years, the balance sheets will be washed free of toxic assets. Whittling the less toxic now, and will eventually get to the butt ugly stuff. Money is a banks product. If it is more or less free, then success is guaranteed eventually. All this distasteful, but that it is the way it is.

January 26 2012 at 10:53 AM Report abuse rate up rate down Reply