Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=199126
Story Retrieval Date: 5/20/2013 2:24:27 AM CST
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Fed extends low rates through 2014
by Gino Vicci
Jan 25, 2012
Ustream/Gino Vicci/MEDILL
Federal Reserve Chairman Ben Bernanke fielded questions from reporters during Wednesday's FOMC press conference.
It also signaled that the Fed intends on keeping the federal funds rate at close to zero through 2014. That rate has remained between zero and 0.25 percent since December 2008.
During his press conference Federal Reserve Chairman Ben Bernanke admitted 2014 was merely a “best guess”.
Bernanke also mentioned that the timeframe could be adjusted if “there is a substantial strengthening of the economy in the near term.”
The federal funds rate is the rate that banks charge each other on overnight loans. It influences all short-term lending rates.
A rate cut can help consumers save money by reducing interest payments on certain types of financing, but it may also hurt savers by reducing the interest earned on bank certificates of deposits, money market accounts and regular savings accounts.
Bernanke recognized the Fed’s decision “poses a cost on savers,” but added that savers ultimately rely on a strong economy for a return on their investments.
However, the Fed's action may pose an inflation risk, in the view of some economists.
“They think they need more stimulation, but they're not going to get it,” said Stephen Williamson of Washington University in St. Louis. “The risk is too high. Inflation is very difficult to control once it gets going.”
Williamson believes there is little the Fed can do to stimulate the economy at this point.
The U.S. central bank operates under a dual mandate imposed by Congress to promote full employment and control inflation.
The Fed is adding to its to-do list by identifying a specific target inflation rate of 2 percent.
In hopes of promoting transparency and predictability, Bernanke announced a strategic policy referred to as “central tendency”, which for the first time reveals how the members of the Federal Open Market Committee vote on monetary policy target rates. In Wednesday's announcement, three members voted to raise rates this year; three voted to raise rates in 2013; five voted to raise rates in 2014; four said 2015; and two said 2016.
