An unexpectedly pessimistic Federal Reserve cast a chill over Americas hope of a growing economic recovery Wednesday with its first policy decision of the new year.The Fed doubled how long it plans to hold interest rates near zero vowing not to raise them until late 2014 instead of an earlier target of mid-2013. Some of the Feds policymakers argued for keeping rates down even longer.It shows how worried they are about the health of the economy, said Ryan Sweet, senior economist at Moodys Analytics Inc. The extended promise not to raise interest rates probably means three more years of historically low borrowing costs for consumers, homebuyers and businesses. Savers, however, will still earn next to nothing.Wednesday was the first time the Fed added the interest rate expectations to its members forecasts for economic growth, unemployment and inflation rates. The new disclosures revealed the wide range of expectations Fed members have for when the economy will be strong enough to raise rates. Eleven of 17 members of the policymaking committee said they didnt see rate increases until 2014 or later, with two of those even saying not until 2016. Six said rate increases should come this year or next. And the Fed, also for the first time, formally set 2 percent inflation as its official target under Congress dual mandate that it maintain stable prices and full employment.The Fed caught some economists off guard with its new forecasts for how slowly joblessness will erode in the recovery. It expects unemployment likely to remain above 7 percent through 2014.They still have the unemployment rate staying very, very high, said John Silvia, chief economist at Wells Fargo Securities.Stocks rallied on the Feds promise to keep supporting recovery, with the Dow Jones industrial average rising 81.21 points to 12,756.96. Rates on U.S. Treasury securities fell, with the rate on five-year Treasuries falling as low as 0.76 percent.Fed Chairman Ben Bernanke said he hoped the forecast would stimulate growth by convincing investors that interest rates will remain low for longer than previously expected.The Feds efforts to hold rates down is partly aimed at getting investors to take more risks with their money; for example, preferring stocks over Treasury securities.Economists generally viewed the Feds comments and actions Wednesday as giving the economys recent gains short shrift. The 17-member Fed policy group lowered its collective forecast of the economys likely pace of recovery for this year and next. Bernanke said during a news conference that retail sales remain weak.I dont think we are ready to declare that we have entered a new, a stronger phase of the recovery, Bernanke said. Silvia, however, said sales were a lagging sign of recovery and that the Fed should have been more impressed that layoffs have slowed sharply and that factory orders are rising. Both, he said, are better indicators of where the economy is heading.Still, there are reasons to worry.Europe already may be in a recession, which would add to the U.S. economys struggles. Planned federal spending cuts and a potential end to the reduction in payroll taxes next month further hamper the growth outlook.The Fed is taking out an insurance policy to make sure nothing derails the economic expansion, said Scott Minerd, chief investment officer at Guggenheim Partners LLC. Theyre not thinking the risks will be behind us this year or next year and might extend into the second half of the decade.Not all economists think the Fed needs to buy so much insurance. When you get out to 2015-2016, if interest rates are still near zero percent, I think thats too loose. The Fed needs to be careful that it doesnt fall too far behind inflation, Sweet said.Kansas City Federal Reserve Bank President Esther George is a member of the policy group but does not have a vote this year. She and the other Fed presidents still participated in the policy discussion and provided their projections for raising interest rates and other economic forecasts released by the Fed Wednesday.Three Fed members pegged the first rate increase to come next year. Four members put the first rate increase in 2015 and two in 2016, later than the groups newly announced date of late 2014.Only five members pegged 2014 as the appropriate year to raise rates.In the news conference that followed the disclosures, Bernanke counted the 11 members preferences for 2014 or later as evidence that the policy decision had broad support. He also acknowledged that the move wont be popular with savers. We do hear about that, obviously, Bernanke said in response to a question about savers complaints.The Fed has held its benchmark policy interest rate near zero since December 2008. In those three years, rates on bank certificates of deposit, safe short-term U.S. Treasury securities and money market accounts have collapsed, paying savers little for their thrift.Bernanke said Fed policymakers know the policy imposes a cost on savers but added that it is necessary to restore the healthy economy savers need to get adequate returns.The Feds diligence against inflation, he added, ensures that their savings dont lose significant purchasing power, he said.Many of the Feds moves buying mortgages and long-term Treasury securities have been aimed at reducing mortgage rates to spur the housing market, support home prices and help homeowners stay in their homes.Bernanke complained that the housing markets exceptionally weak condition has hampered the effectiveness of the Feds actions.Sweet said the promise of low mortgage rates for years to come could further slow housings recovery.The expectation that maybe the sub-4 percent mortgage rate isnt going anywhere anytime soon, until they move higher theres no urgency to go out and buy that home, he said.Bloomberg News contributed to this report.

KansasCity.com

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Fed, worried about recovery, extends low rates

Pledge hints at gloomier outlook on recovery. Jobless rate expected to stay above 7 percent.

By MARK DAVIS

The Kansas City Star

Associated Press file poto

Federal Reserve Chairman Ben Bernanke said he hoped the forecast would stimulate growth by convincing investors that interest rates will remain low for longer than previously expected.

More News

An unexpectedly pessimistic Federal Reserve cast a chill over America’s hope of a growing economic recovery Wednesday with its first policy decision of the new year.

The Fed doubled how long it plans to hold interest rates near zero — vowing not to raise them until late 2014 instead of an earlier target of mid-2013. Some of the Fed’s policymakers argued for keeping rates down even longer.

“It shows how worried they are about the health of the economy,” said Ryan Sweet, senior economist at Moody’s Analytics Inc.

The extended promise not to raise interest rates probably means three more years of historically low borrowing costs for consumers, homebuyers and businesses. Savers, however, will still earn next to nothing.

Wednesday was the first time the Fed added the interest rate expectations to its members’ forecasts for economic growth, unemployment and inflation rates.

The new disclosures revealed the wide range of expectations Fed members have for when the economy will be strong enough to raise rates.

Eleven of 17 members of the policymaking committee said they didn’t see rate increases until 2014 or later, with two of those even saying not until 2016. Six said rate increases should come this year or next.

And the Fed, also for the first time, formally set 2 percent inflation as its official target under Congress’ dual mandate that it maintain stable prices and full employment.

The Fed caught some economists off guard with its new forecasts for how slowly joblessness will erode in the recovery. It expects unemployment likely to remain above 7 percent through 2014.

“They still have the unemployment rate staying very, very high,” said John Silvia, chief economist at Wells Fargo Securities.

Stocks rallied on the Fed’s promise to keep supporting recovery, with the Dow Jones industrial average rising 81.21 points to 12,756.96. Rates on U.S. Treasury securities fell, with the rate on five-year Treasuries falling as low as 0.76 percent.

Fed Chairman Ben Bernanke said he hoped the forecast would stimulate growth by convincing investors that interest rates will remain low for longer than previously expected.

The Fed’s efforts to hold rates down is partly aimed at getting investors to take more risks with their money; for example, preferring stocks over Treasury securities.

Economists generally viewed the Fed’s comments and actions Wednesday as giving the economy’s recent gains short shrift.

The 17-member Fed policy group lowered its collective forecast of the economy’s likely pace of recovery for this year and next. Bernanke said during a news conference that retail sales remain weak.

“I don’t think we are ready to declare that we have entered a new, a stronger phase” of the recovery, Bernanke said.

Silvia, however, said sales were a lagging sign of recovery and that the Fed should have been more impressed that layoffs have slowed sharply and that factory orders are rising. Both, he said, are better indicators of where the economy is heading.

Still, there are reasons to worry.

Europe already may be in a recession, which would add to the U.S. economy’s struggles. Planned federal spending cuts and a potential end to the reduction in payroll taxes next month further hamper the growth outlook.

“The Fed is taking out an insurance policy to make sure nothing derails the economic expansion,” said Scott Minerd, chief investment officer at Guggenheim Partners LLC. “They’re not thinking the risks will be behind us this year or next year — and might extend into the second half of the decade.”

Not all economists think the Fed needs to buy so much insurance.

“When you get out to 2015-2016, if interest rates are still near zero percent, I think that’s too loose. The Fed needs to be careful that it doesn’t fall too far behind inflation,” Sweet said.

Kansas City Federal Reserve Bank President Esther George is a member of the policy group but does not have a vote this year. She and the other Fed presidents still participated in the policy discussion and provided their projections for raising interest rates and other economic forecasts released by the Fed Wednesday.

Three Fed members pegged the first rate increase to come next year. Four members put the first rate increase in 2015 and two in 2016, later than the group’s newly announced date of late 2014.

Only five members pegged 2014 as the appropriate year to raise rates.

In the news conference that followed the disclosures, Bernanke counted the 11 members’ preferences for 2014 or later as evidence that the policy decision had broad support.

He also acknowledged that the move won’t be popular with savers.

“We do hear about that, obviously,” Bernanke said in response to a question about savers’ complaints.

The Fed has held its benchmark policy interest rate near zero since December 2008. In those three years, rates on bank certificates of deposit, safe short-term U.S. Treasury securities and money market accounts have collapsed, paying savers little for their thrift.

Bernanke said Fed policymakers know the policy “imposes a cost” on savers but added that it is necessary to restore the healthy economy savers need “to get adequate returns.”

The Fed’s diligence against inflation, he added, ensures that their savings don’t lose significant purchasing power, he said.

Many of the Fed’s moves — buying mortgages and long-term Treasury securities — have been aimed at reducing mortgage rates to spur the housing market, support home prices and help homeowners stay in their homes.

Bernanke complained that the housing market’s exceptionally weak condition has hampered the effectiveness of the Fed’s actions.

Sweet said the promise of low mortgage rates for years to come could further slow housing’s recovery.

“The expectation that maybe the sub-4 percent mortgage rate isn’t going anywhere anytime soon, until they move higher there’s no urgency to go out and buy that home,” he said.

Bloomberg News contributed to this report.