Recovery Slow and Fed Likely to Hold Interest Rates Low in Response Through 2014

January 26, 2012 at 2:34 PM

The Federal Reserve said Wednesday that unemployment is projected to remain high over the next three years. This is a year longer than previously expected. Policymakers project that the unemployment rate will remain at 8.5 percent for much of this year and only fall to between 6.7 and 7.6 percent by the end of 2014.

“We’re certainly prepared to look for different ways to provide support to the economy if, in fact, we have this unsatisfactory situation,” said Fed Chairman Ben S. Bernanke after a policymaking session. This means the central bank will probably keep interest rates near zero through 2014 if the unemployment rate trends as indicated.

Bernanke made it clear that these are projections only, and that predicting the future path of the economy is a difficult thing to do. In its policy statement the Fed said that the economy has been growing only moderately. After being criticized by economists for repeatedly underestimating the depth of economic challenges facing the county, Fed officials do not want to be accused again not addressing the situation.

To make the most of its low-interest-rate-policies, Fed officials have urged Congress and the Obama administration to relax standard for refinancing mortgages so more Americans can do so. This would be a huge boost to the mortgage industry and having consumers who have re-financed possibly having the opportunity to do so again.

Obama announced such a policy – a large expansion of mortgage financing in his State of the Union address, but the proposal requires Congressional approval. In this election year that could prove very interesting if and when those policies are passed.

Bernanke wants to send a message, as a kind of confidence-building gesture, to business and consumers that they can expect cheap credit for an extended period of time. He also noted that the Fed is ready to step up efforts to pump money into the economy also by buying long-term securities if the Fed thinks it’s appropriate.

Tags: Unemloyment Fed