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Fed surprise as central bank says it will keep rates exceptionally low through end of 2014
01/25/2012 5:01 pm EST
The committee decided to keep its target rate for short-term interest rates at 0% to 0.25%.
No surprise there.
But then it said it anticipated keeping rates at that exceptionally low level through at least late 2014. Previously the Fed had said “though mid-2013.” Recent data that showed a pickup in job growth, better than expected GDP growth, and maybe even a potential recovery in the housing market had led Wall Street to worry that the Fed might reduce the period of exceptionally low rates in today’s statement.
Instead the Fed cited a subdued outlook for inflation and low rates of capacity utilization in the economy to extend its guidance on low rates. In his press conference Fed chairman Ben Bernanke in response to a question on recent signs of growth said that he hopes a strong fourth quarters extends into 2012 but Europe and "other factors" are cause for concern.
Treasuries and U.S. stocks have moved up on the news with the 7-year Treasury note and the 10-year Treasury bond showing the biggest increase in price (and decline in yield.) The yield on the 10-year bond dropped to 1.973% after the announcement.
At 2 p.m. New York time the Fed initiates a new policy as Fed members shared their predictions for economic growth, inflation, and unemployment for the next three years. The big news here--and it explains the "late 2014" language is that the Fed is lowering its projected U.S. GDP growth rate for 2012 to a range of 2.2%-2.7% from the previous 2.5%-2.9% range. Nine of 17 Federal Reserve officials said they expect borrowing costs will remain below 1% at the end of 2014, with six expecting zero rates to remain into 2015.
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