Fed's Low-Rate Promise Lasts Well Into Next Presidential Term: The Ticker

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By Paula Dwyer

How's this for managing expectations? Federal Reserve officials announced today that they expect short-term interest rates to stay close to zero until late 2014. That's where interest rates have been since December 2008, and 18 months longer than the Fed had previously promised to keep rates very low.

It's also nearly two years into the next president's term. If Barack Obama loses, a new Republican president may very well replace Ben Bernanke, based on the pounding the Fed chairman has been getting from Republican candidates on the campaign trail. “I’d like to have a Fed chairman that shares my views and that I have confidence in,” Mitt Romney said in a CNBC interview to air tonight.

Bernanke's interest-rate policy, however, won't be so easily discarded. The FOMC could reverse course, but that would risk market turmoil and may harm the Fed's credibility.

In signaling to companies, consumers and investors that its rates will stay low for a long time, Fed officials hope to push down not only short-term but also long-term rates. This should boost investment, consumer spending and job growth, or so the theory goes.

As part of its new strategy to be more transparent, the Fed revealed that nine out of the 17 members of the Federal Open Market Committee expect rates to stay at or below 0.75 percent until the end of 2014.

In a separate statement of its long-range goals and strategy, the FOMC set a 2 percent goal for inflation. The central bank also lowered its forecast for growth this year to a range of 2.2 percent to 2.7 percent, down from a Novembe4r projection of 2.5 percent to 2.9 percent. It predicted the economy next year will expand 2.8 percent to 3.2 percent, down from of 3.0 percent to 3.5 percent.

(Paula Dwyer is a member of the Bloomberg View editorial board.)








-0- Jan/25/2012 23:24 GMT