- Special Sections
- Public Notices
WASHINGTON (AP) — The Federal Reserve sketched a dim outlook for the economy Tuesday, suggesting it will remain weak for two more years. As a result, the Fed said it expects to keep its key interest rate near zero through mid-2013.
It's the first time the Fed has pegged its "exceptionally low" rates to a specific date. The Fed had previously said only that it would keep its key rate at record lows for "an extended period."
The Fed announced no new efforts to energize the economy in its statement released after its one-day policy meeting. But the statement held out the promise of lower rates on mortgages and other consumer loans longer than many had assumed.
The decision was approved on a 7-3 vote. Three Fed regional bank presidents who have been worried about inflation objected to the move. It was the first time since November 1992 that as many as three Fed members have dissented from a policy statement.
The Fed's new timetable and its implications for the economy led to a wild afternoon of trading on Wall Street. Stocks plunged after the statement was released, but then shot up shortly after. The Dow Jones industrial average sank more than 176 points, then recovered its losses and closed up 429 points for the day.
Many investors sought the safety of long-term Treasurys. The yield on the 10-year Treasury note briefly touched a record low of 2.03 percent before heading higher.
Investors seemed to look past the more downbeat language the Fed used to describe economic conditions. The economy has grown "considerably slower" than the Fed had expected and consumer spending "has flattened out," it said in a statement released after the one-day meeting.
The Fed also said that temporary factors, such as high energy prices and the Japan crisis, only accounted for "some of the recent weakness" in economic activity. Federal Reserve Chairman Ben Bernanke had previously said that the economy would rebound in the second half of the year after such factors eased.
Fed officials "are very nervous about the economy," said Mark Zandi, chief economist at Moody's Analytics. "This is unprecedented for the Fed to indicate they are ready to keep rates low for two more years."
The federal funds rate is the interest that banks charge each other on overnight loans. The Fed has kept its target for the rate at a record low near zero since December 2008, a response to the recession and financial crisis.
Since March 2009 the Fed has only said that it would keep the rate at "exceptionally low" levels for an "extended period." On Tuesday, the Fed dropped the "extended period" language, and said rates would likely stay at those levels "at least through mid-2013."
Some economists said the Fed didn't offer any remedies for the deteriorating economic conditions it described.
University of Oregon economist Timothy Duy called the clearer language about how long rates would stay low "weak medicine." He wanted the Fed to commit to buying more Treasury bonds.
Earlier this summer, the Fed ended a $600 billion Treasury bond-buying program. The bond purchases were intended to keep rates low to encourage spending and borrowing and lift stock prices.
The Fed did hold out the promise of further help in the future. But it did not spell out what else it might do.
Dean Maki, chief U.S. economist at Barclays Capital, said the large number of dissents suggests that Bernanke would have trouble building consensus for another round of bond purchases.
"Nothing here says they're not going to do (it)," Maki said. But "it does suggest that there is significant resistance on the committee."
Fed officials met against a backdrop of speculation that they would say or do something new to address a darkening economic picture. The stock market has plunged and government data have signaled a weaker economy in the four weeks since Bernanke told Congress that the Fed was ready to act if conditions worsened.
The economy grew at an annual rate of just 0.8 percent in the first six months of the year. Consumers have cut spending for the first time in 20 months. Wages are barely rising. Manufacturing is growing only slightly. And service companies are expanding at the slowest pace in 17 months.
Employers hired more in July than during the previous two months. But the number of jobs added was far fewer than needed to significantly dent the unemployment rate, now at 9.1 percent. The rate has exceeded 9 percent in all but two months since the recession officially ended in June 2009.
Fear that another recession is unavoidable, along with worries that Europe may be unable to contain its debt crisis, has rattled stock markets. The Dow Jones industrial average has lost nearly 15 percent of its value since July 21. On Monday, it fell 634 points — its worst day since 2008 and sixth-worst drop in history.
The tailspin on Wall Street was further fueled by Standard & Poor's decision to downgrade long-term U.S. debt.
Bernanke didn't speak publicly after Tuesday's Fed meeting. The chairman this year made a historic change by scheduling news conferences after four of the Fed's eight policy meetings each year, but Tuesday's wasn't one of them.
Later this month at the Fed's annual retreat in Jackson Hole, Wyo., Bernanke will likely address the weakening economy, the S&P downgrade and the market turmoil.