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August 9, 2011 > Fed may provide more guidance on interest rates

Fed may provide more guidance on interest rates

By Martin Crutsinger, AP Economics Writer

WASHINGTON (AP), Aug 05 - The Federal Reserve may offer a clearer explanation next week for how long it intends to keep short-term interest rates at record lows. More explicit language would give financial markets more confidence at a time when the global economy is trying to avoid another recession.

Some economists say the central bank may go as far to include a time frame. Others say the Fed may narrow the definition of what it means when it says rates will be kept at record lows for ``an extended period.''

Joel Naroff, chief economist at Naroff Economic Advisors, said the Fed may use the statement to ``signal next week that it is prepared to keep rates low for a longer period of time than had been expected.'' Many economists agree that would signal no rate change in 2012.

A string of weak reports in the past week showed the United States economy has weakened and isn't growing fast enough to significantly lower the unemployment rate. And Europe is struggling to keep its debt crisis from spreading to Italy and Spain.

Fear of either continent suffering another downturn has rattled Wall Street. Stocks have lost more than 10 percent of their value since July 21. Friday's stronger-than-expected jobs report barely lifted the Dow Jones industrial average to close 61 points up for the day.

Prior to the sell-off, Federal Reserve Chairman Ben Bernanke told Congress in July that the Fed stood ready to step in and help the economy, if it continued to sputter. He noted that it could provide ``more explicit guidance'' about how long it planned to keep the federal funds rate at a record low of zero to 0.25 percent. It has been at that rate since December 2008.

Since March 2009, the Fed has said only that it plans to keep the rate at ``exceptionally low'' levels for an ``extended period.'' Many economists expect the Fed on Tuesday will spell out what ``extended period'' means.

Mark Zandi, chief economist at Moody's Analytics, said the statement could actually include a reference to summer 2012. Some analysts say the Fed may even go further than that.

Bernanke also told lawmakers that the Fed could launch a third round of bond purchases. The Fed in June completed its $600 billion Treasury bond purchases, which were intended to help the economy by lowering rates on mortgages and other loans.

Many analysts believe that the economy would have to be in much worse shape for Fed policymakers to agree on another round of bond purchases. A few Fed members strongly oppose another round of stimulus, saying it could spark inflation.

Bernanke in his July testimony said the Fed would consider more stimulus only if the economy weakened further and the threat of deflation returned. Deflation is a prolonged period of falling prices which the United States has not seen since the Great Depression.

Fed officials were worried about deflation and weak economic growth last summer when Bernanke raised the prospect of a second round of bond buying.

``There will be a high hurdle for considering a third round of bond buying,'' said David Jones, chief economist at DMJ Advisors, a Denver economic consulting firm. ``Fed officials who opposed the second round will argue that the Fed has done all it can to help the economy and anything more will risk higher inflation down the road.''

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