Federal Reserve Extends Low Interest Rate Pledge
Fed Chairman Ben Bernanke surprised market speculators earlier today, extending the period in which central bankers are keeping rates at record lows. In a scheduled decision earlier this afternoon, the US central bank elected to keep interest rates at their current 0.25% standing. But, policymakers added comments that hinted at further monetary policy stimulus in the near term. The indications sent markets higher – especially the Euro and benchmark Dow Jones Industrial Average. The single currency finished the day above 1.3100 while US equity markets ended the day higher by an average of 1.1%.
According to the policy statement, US monetary policymakers continue to be concerned over the current labor environment – which has remained a key component of current economic weakness in the past couple of quarters. Declining to establish a benchmark for improvement in the country’s labor market, central bankers noted that employment concerns continue to exist – against many Fed expectations for a long run jobless rate of 6%. However, policymakers did note that there is a “subdued outlook for inflation over the medium term”, which will likely allow for “highly accommodative stance” when it comes to monetary policy. As a result, the US Federal Reserve is likely to keep benchmark interest rates lower through till 2014, while remaining “prepared to to provide further monetary accommodation if employment is not making sufficient progress.”
The comments were made along side lowered forecasts for gross domestic product figure in both this year and next. For 2012, the US economy is expected to expand at a 2.2-2.7% pace, increasing to 2.8-3% in 2013.
Notably, the statement was released in tandem with forecasts by Fed members – a first for the central bank in an attempt for further transparency. Interestingly, nine of the Federal Reserve members forecasted rates lower than 1% through till 2014, with six seeing rates closer to zero in the next 3 years.