WASHINGTON — The Federal Reserve said Wednesday that it would keep interest rates near zero through 2014 or longer to help boost the economy, and, for the first time, it set an explicit inflation target of 2 percent, signaling that the central bank is frustrated with the weak pace of growth.
The decision to maintain extraordinarily low rates extends the Fed’s time frame by 18 months, and in a news conference, Chairman Ben Bernanke said the central bank was prepared to take more action if necessary to keep the economy moving. Bernanke did not say what tools the Fed might use, but in the future it could, for example, buy up additional mortgage assets to drive down rates.
By announcing an inflation target of 2 percent, Bernanke said the Fed believed that making the public more aware of what was behind the central bank’s decisions would help ease financial conditions and maintain price stability. He said the Fed was not concerned about rising inflation.
The action on interest rates reflects Fed projections that the unemployment rate is likely to remain well north of 7 percent for three more years, but it did not say how far the jobless rate would have to drop before it considers tightening its monetary policy.
“The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market,” the Fed statement said. “These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specific a fixed goal for employment.”
The vast majority of the Fed leaders agreed with the decision on interest rates. Eleven Fed leaders said it is appropriate to start raising rates in 2014 or beyond, 18 months longer than previously planned; just six said it is more appropriate to raise rates this year or next. Previously, the Fed said it would keep interest rates near zero through mid-2013.
Most Fed leaders also suggested that when the central bank does act to raise interest rates, it should do so very gradually. Most believe that interest rates should still be well below 1 percent at the end of 2014, according to the projections.
