Interest rates will stay low, low, low

WASHINGTON – Jan. 26, 2011 – Consumers and businesses can brace for another two years of exceptionally low interest rates after the Federal Reserve said Wednesday it is likely to keep its rates below 1 percent until late 2014 because of the economy’s continued weakness.

The decision means the era of historically low rates on loans – and savings – that the Fed kicked off at the peak of the financial crisis in late 2008 will run longer unless the economy improves faster than Fed policymakers predict.

The Fed said unemployment would stay near its 8.5 percent level through the end of this year and could still be in the range of 6.7 percent to 7.6 percent at the end of 2014. Housing remains depressed while growth in business investment has slowed, it said.

Meanwhile, inflation is staying below 2 percent.

Fed Chairman Ben Bernanke left open the possibility that the Fed could do more to fight joblessness, even at the short-term risk of inflation above the bank’s 2 percent annual target.

“There has been some encouraging news recently,” Bernanke said at a press conference. “There are positive signs, no doubt. At the same time, there are mixed signals,” as indicators such as retail sales growth have been disappointing, he said. Policymakers are also worried about Europe’s financial crisis, he said.

The Fed’s moves, and especially its decision to discuss its thinking about rate policy much more publicly than it has in the past, are laden with consequences for savers, borrowers and consumers, said PNC Financial chief economist Stuart Hoffman.

“It means that if you own certificates of deposit and you’ve bemoaned low rates, bad news – you’re going to get that this year, next year and the year after,” Hoffman said. “If you’re a borrower, very low mortgage rates are going to be here for a while. Some people may delay making decisions, but other people will plan for the future” and prepare either to buy or renovate homes, he said.

Bernanke acknowledged that savers are hurt by the low rates. “We realize that low interest rates impose a cost,” he said. “The savers in the economy are dependent on a good economy to get a good return.”

Wall Street reacted favorably to the news, pushing stocks higher and interest rates lower. The Dow Jones industrial average climbed 83 points to 12,759.

The yield on 10-year U.S. Treasuries, which closed at 2.06 percent Tuesday, dropped as low as 1.91 percent before settling at 1.99 percent.

Most Fed governors think the economy will grow by 2.2 percent to 2.7 percent this year, with unemployment at 8.2 percent to 8.5 percent and core inflation at 1.5 percent to 1.8 percent, the Fed said.

© Copyright 2012 USA TODAY, a division of Gannett Co. Inc., Tim Mullaney