Fed to investors: Interest rates to stay low

Federal Reserve Chairman Ben Bernanke testifies on Capitol Hill in Washington before the Senate Banking Committee July 14, 2011, to deliver the semiannual Monetary Policy Report. / AP Photo

Updated at 3:08 p.m. ET

WASHINGTON - The Federal Reserve sketched a dim outlook for the economy Tuesday, suggesting it will remain weak for two more years. As a result, the Fed said it expects to keep its key interest rate near zero through mid-2013.

It's the first time the Fed has pegged its "exceptionally low" rates to a specific date. The Fed had previously said only that it would keep it key rate at record lows for "an extended period."

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Stocks plunged after the statement was released. Investors interpreted it to mean the weak economy could hold back corporate earnings longer than they had assumed. The Dow Jones industrial average sank more than 176 points. It had been up more than 200 points earlier in the day.

Investors shifted money into the relative safety of long-term Treasurys, whose yields fell.

"There is a definite undertone of significant economic concern from the Federal Reserve," said Greg McBride, an economist with Bankrate.com.

University of Oregon economist Timothy Duy called the move "weak medicine."

Duy said he wanted to see the Fed commit to buying more Treasury bonds, to try to keep long-term rates down, until the economy improved.

The Fed's two-year time frame for any rate increase underscored a stark reality: A sluggish economy and painfully high unemployment have become chronic.

The Fed did hold out the promise of further help down the road but did not spell out what else it might do.

The central bank's decision was approved on a 7-3 vote with three Fed regional bank presidents who have been worried about inflation objecting. It was the first time since November 1992 that as many as three Fed members have dissented from a policy statement.

Fed policymakers used significantly more downbeat language to describe current economic conditions. It said so far this year the economy has grown "considerably slower" than the Fed had expected. They also said that temporary factors, such as high energy prices and the Japan crisis, only accounted for "some of the recent weakness" in economic activity.

The more explicit time frame is aimed at calming nervous investors. It offered them a clearer picture of how long they will be able to obtain ultra-cheap credit, and was at least a year longer than many economists had expected.

Fed officials met against a backdrop of speculation that they would say or do something new to address a darkening economic picture. The stock market has plunged and government data have signaled a weaker economy in the four weeks since Chairman Ben Bernanke told Congress that the Fed was ready to act if conditions worsened.

The economy grew at an annual rate of just 0.8 percent in the first six months of the year. Consumers have cut spending for the first time in 20 months. Wages are barely rising. Manufacturing is growing only slightly. And service companies are expanding at the slowest pace in 17 months.

Employers hired more in July than during the previous two months. But the number of jobs added was far fewer than needed to significantly dent the unemployment rate, now at 9.1 percent. The rate has exceeded 9 percent in all but two months since the recession officially ended in June 2009.

Fear that another recession is unavoidable, along with worries that Europe may be unable to contain its debt crisis, has rattled stock markets. The Dow Jones industrial average has lost nearly 15 percent of its value since July 21. On Monday, it fell 634 points -- its worst day since 2008 and sixth-worst drop in history.

The tailspin on Wall Street was further fueled by Standard & Poor's decision to downgrade long-term U.S. debt.

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Bernanke didn't speak publicly after Tuesday's Fed meeting. The chairman this year made a historic change by scheduling news conferences after four of the Fed's eight policy meetings each year, but Tuesday's wasn't one of them.

Later this month at the Fed's annual retreat in Jackson Hole, Wyo., Bernanke will likely address the weakening economy, the S&P downgrade and the market turmoil.

Earlier this summer, the Fed ended a $600 billion Treasury bond-buying program. The bond purchases were intended to keep rates low to encourage spending and borrowing and lift stock prices.

[RobAla]

How can Federal Reserve Chairman Ben Bernanke see two years into the future to know what interest rates should be? Interest rates are used to stabilize the US Dollar. It smacks a little of either playing politics or he may be afraid America my begin to point fingers at the Fed. I love low interest rates, but this is odd.

[samael2014]

"You heard me right," exclaimed the Fed Chairman, "while the United States continues to wallow in debt and the interest on that debt, select few who have milked taxpayers, consumers and this economy for all that it's worth will continue at a record setting pace to get handouts of taxpayer cash, INTEREST FREE! and that does not get passed on to benefit anyone else! Please use it to plow into a bottomed out stock market you created for maximm gains for you!

And if that wasn't enough, I will also choose a few lucky profiteerig parasites to sell bonds to, so that I can turn around and buy them with the magic free money Printed PLUS a special instant profit to you!

It's laugh in the face of credit ratings days here at the FEd, our loss is your gains!"

[nottellin1]

The FOMC is no hero. Guess what? Interest rates cannot go up! The Fed will keep them low, not til 2013 but indefinately because if they did not, the US would not have the money to service its debt.

S & P is right, our debt is unsustainable. I just wonder what took them so long and why the other rating agencies are waitning.

[venusvegasvada]

Here's how you fix this:

-Re-instate the Glass-Steagall Act
-Repeal the Gramm-Leach-Bliley Act
-Re-instate the Gold Standard for US currency
-Instate the Line Item Veto
-Instate the Loser-Pays Legal System
-Overhaul the election system to eliminate any outside special interest group involvement
-Balanced budget amendment

All it takes is a true Govt that is by ALL the people and for ALL the people. Not just the bankers and lawyers and special interest groups.

We have the finest minds in the world in the US. The problem is they aren't working in the Govt. or in Banking or in the Legal system.

[jgg000101]

ben bernake, who cbs highlighted as a "genius" on 60 minutes, is so lost, clueless, and desperate that the minute he started talking the markets started tanking. Everybody knows his back is against the wall and he is out of options. Everybody, particularly the business and invest communities, also knows that the cost of borrowing money is going to go up as will interest rates and the rate of inflation. There are no more arrows left in bernake's quiver. He might as well tap dance.