Federal Reserve to Keep Rates Near Zero Through 2014?

The Federal Reserve may alter the language of its monetary policy statement at next month’s Federal Open Market Committee (FOMC) meeting in a move that could keep interest rates at record low levels for longer than previously anticipated.

This morning the Wall Street Journal reported that the Ben Bernanke-led U.S. central bank “could signal it is likely to keep short-term interest rates near zero into 2014 or beyond, to bolster the fragile economic recovery.”  The rationale for the change stems from news that “Fed officials have grown increasingly uncomfortable with their August statement that they are likely to hold short-term rates exceptionally low at least through mid-2013. Some believe low inflation and high unemployment could warrant low rates for longer.”

While the Fed funds futures market – which the report points out – is currently forecasting a 50% chance that the Fed will not begin raising rates until January 2014, the aforementioned change to the FOMC statement would provide even more of a tailwind for the price of gold and other U.S.-dollar denominated asset classes.

Additional highlights from the WSJ’s report include:

When the Fed revises its communications approach, there is a good chance it will cease offering a fixed date for the timing of rate increases. Instead, officials could signal their intentions by publishing a range of their forecasts for rates along with their quarterly economic projections. Some officials see this approach as one that would be easier to update and would better link the Fed’s guidance with its outlook for the economy.

Economist Michael Feroli at J.P. Morgan Chase believes the Fed will release forecasts Jan. 25 showing rates will start to rise only in the final quarter of 2014. “That could lift markets and the economy a little, but it wouldn’t be the big surprise we got in August,” he said.

Another possibility is that Fed officials would give more details about what must happen to inflation and unemployment for them to raise rates—and let the market infer from that when the central bank might act. Right now, the Fed puts it in fairly general terms, saying it believes “low rates of resource utilization and a subdued outlook for inflation over the medium run” are likely to warrant ultralow rates.

The Fed is unlikely to agree on specific triggers, such as saying it wouldn’t raise rates until unemployment falls below 7% and as long as inflation stays below 3%—a proposal made by Chicago Fed President Charles Evans. But officials may be able to find a way to link policy moves more closely to their two goals of low inflation and unemployment.