Fed says rates to stay low until jobless figures drop

WASHINGTON — The Federal Reserve said Wednesday that it plans to hold short-term interest rates near zero as long as the unemployment rate remains above 6.5 percent, reinforcing its commitment to improve labor market conditions.

The Fed also said it would continue in the new year its monthly purchases of $85 billion in Treasury bonds and mortgage-backed securities, the second prong of its effort to accelerate economic growth by reducing borrowing costs.

But Fed officials still do not expect the unemployment rate to fall below the new target for at least three years, according to forecasts also published Wednesday, and they chose not to expand the Fed’s stimulus campaign.

At a news conference after the announcement, Fed Chairman Ben Bernanke said the central bank was constrained in its ability to do more.

“If we could wave a magic wand and get unemployment down to 5 percent tomorrow, obviously we would do that,” Bernanke said. “But there are constraints in terms of the dynamics of the economy, in terms of the power of these tools and in terms that we do need to take into account other costs and risks that might be associated with a large expansion of our balance sheet.”

The announcements reinforced a policy shift that began in September, when the Fed first said it would keep buying bonds until the job market improved.

As in September, the Fed sought to make clear Wednesday that it is not responding to evidence of new economic problems but instead is increasing its efforts to address problems that have restrained the recovery. The most recent jobless rate, for November, was 7.7 percent.

Bernanke said the decision to publish economic objectives “makes more explicit the FOMC’s intention to maintain accommodation for as long as needed,” referring to the Fed’s open market committee.

The slow pace of inflation has made the policy shift easier.

The Fed said it expects prices to rise at or below the 2 percent annual pace that it considers most healthy.

But the Fed also said that it was inclined to tolerate medium-term inflation as high as 2.5 percent without breaking its focus on reducing the unemployment rate.

The targets replace the Fed’s earlier guidance that it expected interest rates to remain near zero until at least mid-2015.

The Fed said, however, that it expected to maintain its current policies until mid-2015.

By BINYAMIN APPELBAUM The New York Times

By BINYAMIN APPELBAUM
The New York Times