New window on Fed thinking: Interest rates to stay low until 2014

Delivering on a recent promise to convey its policy intentions more transparently to investors and the public, the Fed said it expected to keep short-term interest rates low into 2014.

The Federal Reserve delivered Wednesday on a promise of greater transparency on its policy outlook, giving a forecast that the interest rate it controls will stay low into the year 2014.

Previously, the Fed had said it would keep its short-term interest rate low through the middle of 2013.

In releasing its forecast, the central bank, for the first time, divulged the individual forecasts of its policy committee members on such things as the expected direction of interest rates over the next several years. That information, the Fed hopes, will help to convey its policy intentions more accurately to investors and the public.

The Fed also offered an official target for consumer price inflation – 2 percent a year – in its policy statement, a number consistent with guidelines the Fed has given in the past. The Fed's congressional mandate includes maintaining rough price stability, allowing neither runaway inflation nor a potentially devastating cycle of deflation that could push investors and consumers to the economic sidelines.

The views of policymakers were not linked with individual names, such as that of Fed Chairman Ben Bernanke. But the report gives a clear window into the gap between so-called inflation "hawks," and "doves," and those in between on policy.

In charts showing a dot for the position of each committee member, investors learned that six committee members believe policy should be tightened (such as by raising the interest rate modestly) this year or in 2013. Another five see 2014 as the likely timing for tightening. And six expect 2015 or 2016 to be the optimal time.

The Fed's report, following a scheduled policy meeting, also showed how fast a rise in interest rates policymakers view as healthy for the economy. A handful in the hawkish, inflation-wary camp would like to see the Fed's interest rate rising to about 1 percent this year and 2.5 percent by 2014. By contrast, a slim majority of the 17 forecasts shown call for the rate to remain below 1 percent even in 2014.

Longer run, the committee has a strong consensus: The interest rate should be at a level more like 4 or 4.5 percent in a normal economy.

Interest rates on US Treasury bonds fell sharply (the yield on the 10-year note dropped to about 2 percent) as the Fed released its policy statement. Stock prices rose about 1 percent for the day, on average.

Many economists applaud the Fed for providing greater transparency. But the announcement of intentions to keep the short-term lending rate very low (now near zero percent) is controversial.

Supporters say it provides a reassuring signal that the Fed will maintain a supportive monetary policy as the economy stages what's expected to be a continued gradual recovery from the deep recession that officially ended in 2009. But some critics warn that it's hard to predict economic events for this year, let alone through 2014.

"Often, decision makers will extend the present into the future, and this is exemplified ... today" by a Fed policy committee expecting moderate growth and subdued inflation to persist into late 2014, John Silvia, chief economist of Wells Fargo, said in a written comment on the Fed's move. "History suggests that such an outlook is actually very unlikely."

Chairman Bernanke himself emphasized in a press conference that the outlook for rates to remain low is an expectation, not a firm pledge by the committee he heads.

The Fed has the options open to tighten interest rates sooner, if warranted. And Bernanke said the policymakers have tools to provide additional monetary fuel for the economy if they see a risk that the recovery will falter.

The Fed committee modestly downgraded its economic growth forecast for the current year. It expects the economy to grow between 2.2 and 2.7 percent in 2012, down from November's forecast of  2.5 to 2.9 percent. Still, the Fed sees some improvement in the job market. It said unemployment should fall as low as 8.2 percent this year, down from a forecast two months ago of 8.5 percent.