Federal Reserve Seen Keeping Interest Rates Near Zero

federal reserve interest rates economy ben bernanke
Jason Alden, WPA Pool/Getty ImagesFederal Reserve Chairman Ben Bernanke.

WASHINGTON -- A combination of scant inflation and still-modest U.S. economic growth will likely lead the Federal Reserve this week to maintain its drive to keep borrowing costs at record lows indefinitely.

The Fed has said it plans to keep its key short-term interest rate near zero at least until the unemployment rate drops below 6.5 percent from its current 7.6 percent. It's also been buying $85 billion a month in Treasurys and mortgage bonds to try to keep long-term borrowing rates down. The goal has been to energize the economy through more consumer and corporate borrowing.

In recent months, many economists had suggested that the Fed might scale back its bond purchases in the second half of 2013 if job growth accelerated. But the jobs report for March was surprisingly weak. And inflation has been running below the Fed's target rate, allowing it to keep stimulating the economy without igniting price increases.

"I am not looking for any major action from this meeting," says David Jones, an economist at DMJ Advisors.

The Fed's interest rate-setting committee will begin a two-day meeting Tuesday and will issue a policy statement once its meeting ends Wednesday afternoon.

Fanning Inflation Fears

The minutes of the Fed's last meeting in March suggested that some policymakers favored slowing and eventually ending its bond buying -- as long as the economy and the job market kept improving. Some feared that keeping rates too low for too long could escalate inflation, fuel speculative asset bubbles or unsettle markets once the Fed has to start raising rates or unloading its record $3 trillion investment portfolio.

Early this month, though, the government said U.S. employers added only 88,000 jobs in March, far below the 220,000 average in the previous four months. Last week, it said the economy grew at an annual rate of 2.5 percent in the January-March quarter -- a decent growth rate but one that's expected to weaken in coming months because of federal spending cuts and higher Social Security taxes.

At the same time, consumer inflation as measured by the gauge the Fed most closely monitors remains well below its 2 percent target. That gauge rose just 1 percent in the 12 months that ended in March.

Analysts now think the Fed will keep the Fed's easy-credit policies unchanged, possibly for the rest of the year.

"The government's fiscal austerity is kicking in and hitting the economy hard," says Mark Zandi, chief economist at Moody's Analytics. "I am not looking for any change in Fed policy at this meeting, not with this weak growth and low inflation."

After years of debate, the Fed in January 2012 followed the lead of many other central banks around the world in establishing an inflation target of 2 percent. The Fed's goal is to keep price changes from hurting the economy.

This could occur if inflation raged out of control or if the opposite problem -- deflation -- emerged. Deflation is a prolonged drop in wages, prices and the value of assets like stocks and houses.

The United States last suffered serious deflation during the Great Depression of the 1930s. But Fed policymakers think the risks of deflation can rise as inflation falls below 2 percent. They want to avoid following the path of Japan, which has struggled with weak growth and deflation for more than two decades.

Economists don't think the latest economic data will lead the Fed to step up the size of its bond purchases. But they say the figures should embolden the majority of officials who back Chairman Ben Bernanke's commitment to keep borrowing rates down until the economy shows sustained improvement -- as long as inflation stays low.

"The Fed can't wink, scratch its nose, wiggle its ears or do anything that would signal they are about to change policy from what they are doing now," says Brian Bethune, an economics professor at Gordon College in Wenham, Mass. "That would be totally premature."

Bethune says the Fed needs to be especially cautious in signaling any policy shift because the U.S. economy has been serving as a global engine of growth. Many European countries are still struggling to escape a recession that followed the region's debt crisis.

"Anything the Fed did that could disrupt things or create uncertainty could tip the whole global economy back into recession," Bethune says.

Few expect the central bank to start raising short-term rates before late 2015 or early 2016. And many economists think the Fed will keep buying $85 billion in bonds each month for the rest of this year, before starting to curtail its purchases in early 2014.

Still, some analysts say that if the economy emerges from a slowdown caused in part by the government cuts and starts accelerating, the Fed might taper its bond purchases by fall.

Whenever the Fed does decide to signal a potential pullback of its aggressive credit easing, after a long period of record-low rates, analysts say the shift could jolt investors.

"No one can predict how much financial market instability we are likely to get when the Fed finally begins pulling back," Jones says.

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Keeping low interest rate is a mistake and we have seen low interest rates have not increased jobs or help the economy. Low interest rates have only been forced on us so the government can spend more money. The best economy we had was when housing loans were over 10%. NOW I DO NOT WANT THAT AGAIN but higher interets rates will halp people save more to prepare for retirement. Government should HAVE TAX BREAKS TO ENCOURAGE PEOPLE TO SAVE THEIR MONE. Our first problem is putting people back to work. Obamacare will kill employment and increase healt care. We have the Highest Coporate Tax rate in the world. This alone kills businesses to be in America.

May 09 2013 at 9:10 AM Report abuse rate up rate down Reply

WTF? SCANT INFLATION? Have they ever shopped at a grocery store?

May 06 2013 at 6:52 PM Report abuse rate up rate down Reply

Federal Reserve will hold the economy down as long as they contnue to hold down the interest rate. Until the unemployment improves? That might be never, however it's driving Wall Street and making the rich richer! Middle Class, work for the rich and support the poor.

April 30 2013 at 3:33 PM Report abuse rate up rate down Reply

Just keep voting for the liberal Democrats who love Bernanke ---- and you will suffer. Hopefully the upcoming mid-terms will change things and allow the GOP to control spending by taking the Senate and keeping the house.......

April 30 2013 at 2:43 PM Report abuse rate up rate down Reply

Bernanke has got to go !! He is way way off base....... Even his old boss (Greenspan) would, I am sure, disagree with his assessment of interest rates!! It is a scam to keep them artificially low and hurts commerce!!!! We as, taxpayers, are being scammed !!!!

April 30 2013 at 2:41 PM Report abuse +1 rate up rate down Reply
Teddy Galea

Interest rates are 0% and banks are raking in BIG billions of $ in profits.

April 30 2013 at 2:37 PM Report abuse rate up rate down Reply

The Federal Reserve is creating a huge bubble by artificially and severely depressing interest rates. This bubble will burst late in 2013 or early 2014 and result in SUPER inflation. Prices will sky rocket and the dollar will be worth next to nothing. Bernanke is ruining the economy of America. It is inly a matter of time. It appears onlty then, when it is too late, will the American people wake up.

April 30 2013 at 2:08 PM Report abuse +1 rate up rate down Reply

Just keep devaluing that dollar. Sell the same number of widgets for less Euros but more dollars and management looks great. Big deal.

April 30 2013 at 1:33 PM Report abuse +1 rate up rate down Reply

Our Government is absolutely killing the Seniors. The little savings my Husband and I have saved over 50 years of working is rapidly being depleted as there now is simply no interst being paid. After 50 years of working and paying taxes we are simply being thrown under the Bus. Thank you vey much Mr. Bernanki.

April 30 2013 at 1:28 PM Report abuse +1 rate up rate down Reply

He needs to bring the rates up .25%!

April 30 2013 at 12:23 PM Report abuse rate up rate down Reply