The Federal Reserve will hold its benchmark federal funds rate at zero to .25 percent “at least through late 2014,” concluded its monetary policy-setting committee after citing a U.S. economy that has expanded moderately despite slower global growth.
In doing so, the Fed pushed back considerably – by 18 months – its previous stance of keeping rates exceptionally low through mid-2013.
The Fed’s decision – based in large part on a still elevated unemployment rate – means mortgage rates and equity lines of credit will likely continue to hover near record lows for 2012 and into next year, barring an unforeseen faster recovery for the housing market.
It also means that an economic recovery warranting higher rates is another three years away.
The Fed reported that 6 of the 17 members of the committee expected that the central bank would raise interest rates to somewhere between 1 percent and 3 percent by the end of 2014. The remaining 11 members project that the Fed will hold rates at or below 1 percent by the end of 2014.
The Fed is giving a breakdown of interest rate forecasts from its committee members for the first time as part of a campaign of greater transparency. It also hopes the long range projections will stimulate the economy by keeping rates low on mortgages, and car and student loans.
The central bank said it expects the unemployment rate to fall to between 8.2 percent and 8.5 percent in 2012, an improvement over what it had predicted this past November. But the Fed is also predicting the economy will grow between 2.2 percent and 2.7 percent this year, slightly slower than it previously projected.
The unemployment rate is currently at 8.5 percent.
By 2014, the Fed anticipates the unemployment rate to fall to between 6.7 percent and 7.6 percent, also slightly lower than it previously thought.
Fed members expect that the unemployment rate will decline gradually “toward levels that the Committee judges to be consistent with its dual mandate” of fostering maximum employment and price stability.
“While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated,” the Fed said in its overview of this week’s Federal Open Market Committee meeting. “Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed.”
The Fed also said inflation has been subdued in recent months, and longer-term inflation is expected to remain stable.
Banks use the target funds rate set by the central bank as a benchmark for setting interest rates for prime loan customers. A higher funds rate would mean subsequent higher rates on credit cards, home equity lines and mortgages.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate.
