By Steven K. Beckner

WASHINGTON (MNI) – With individual policymakers’ federal funds rate
forecasts yet to come, the Federal Reserve’s rate-setting Federal Open
Market Committee has announced a dramatic extension of its period of
bare minimum short-term interest rates.

Instead of forgoing a “forward guidance” passage in its statement,
now that its members will be projecting federal funds rate levels, the
FOMC adapted the language to more closely reflect market expectations.

The decision, which followed two days of meetings, the first of the
year, did not please everybody on the committee.

The FOMC has been holding the key federal funds rate near zero for
more than three years, and now it says it expects to keep the overnight
money market rate “exceptionally low” “at least through late 2014.”

The committee had previously said it expected to keep the funds
rate that low ’til at least mid-2013.

Underscoring its intention to not only hold down short-term rates
but also, implicitly, its efforts to keep long-term rates low by
maintaining a large balance sheet, the FOMC said it “expects to maintain
a highly accommodative stance for monetary policy.”

The FOMC said it plans to continue its $400 billion “maturity
extension program,” so-called “Operation Twist,” as well as its policy
of reinvesting principal payments from its holdings of agency debt and
agency mortgage-backed securities in agency mortgage-backed securities
and of rolling over maturing Treasury securities at auction.

Richmond Federal Reserve Bank President Jeffrey Lacker was the lone
dissenter, voting no because he “preferred to omit the description of
the time period over which economic conditions are likely to warrant
exceptionally low levels of the federal funds rate.”

In announcing its decision, the FOMC cites slower business
investment and world economic growth, still “elevated” unemployment and
“significant downside risks” from global financial strains. It calls
inflation “subdued.”

The Fed will shortly release three-year funds rate forecasts for
the first time. And Fed Chairman Ben Bernanke will elaborate in a news
conference scheduled for 2:15 p.m. ET.

** Market News International Washington Bureau: 202-371-2121 **

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