Fed Predicts 3 More Years Of Bad

The United States is facing three more years of high unemployment.

This is the key takeaway from the statement the Federal Reserve just released. Of course, the Fed being the Fed, they don't come right out and say that. They say this instead:

In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

Here's what that means:

"...the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent..."

The Fed has two main jobs: Keep inflation in check, and keep unemployment low. The main lever the Fed uses for both of these jobs is the federal funds rate — basically, short-term interest rates.

If the Fed thinks the economy is overheating — if unemployment is low and inflation is high — it will raise interest rates. This discourages businesses and individuals from borrowing and spending, and cools the economy.

If the Fed thinks the economy is sluggish — if inflation is low, and unemployment is high — it will lower interest rates. Back in 2008, when the economy was collapsing, the Fed cut short-term interest rates to zero, the lowest level in decades. Rates have remained at zero ever since.

"economic conditions ... are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014"

Since lowering short-term interest rates to zero, the Fed has faced a problem: Unemployment has remained high, but short-term interest rates can't go any lower than zero.

So the Fed has tried a few things to push further, including publicly announcing its intention to keep short-term rates super low for a long time. The basic idea is that announcing these intentions should push down longer-term interest rates, encouraging companies to borrow money and hire new employees.

Initially, the Fed said only that it planned to keep rates super low for "an extended period." Then, last summer, the Fed came right out and said it planned to keep rates super low until mid 2013.

In today's statement, the Fed extended its plans much further into the future — to the end of 2014.

In other words, the Fed said today: The long-term outlook for the economy is so bleak that we're probably going to leave this extreme, zero-interest rate policy in place for another three years.

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