–Updating Story Published 13:12 ET, Additional Material

By Steven K. Beckner

WASHINGTON (MNI) – With individual policymakers’ federal funds rate
forecasts being revealed for the first time, 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.

In another notable departure, the FOMC for the first time published
a statement of its goals which included a long-run inflation objective
of 2% as part of a statement of the Fed’s “longer-run goals and policy
strategy. It did not call it an explicit target

Instead of forgoing a “forward guidance” passage in its statement,
now that its members are 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.”

Accompanying charts revealing FOMC participants’ predilections on
the path of the funds rate showed 11 of the 17 projecting the earliest
rate hikes coming 2014 at the earliest — five in 2014, four in 2015 and
2 in 2016. Only three saw the funds rate being raised this year, and
only two next year.

By the end of 2014, fully 11 policymakers expected the funds rate
to be 1% or lower with six anticipating that the rate will remain near
zero.

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.”

In addition to the usual policy statement, the FOMC released a
consensus statement of goals and strategy, which includers what is sure
to be seen on Capitol Hill and elsewhere as an inflation target —
something the Fed has long avoided due to political concerns.

“The inflation rate over the longer run is primarily determined by
monetary policy, and hence the Committee has the ability to specify a
longer-run goal for inflation,” the FOMC said, adding, “The Committee
judges that inflation at the rate of 2%, as measured by the annual
change in the price index for personal consumption expenditures, is most
consistent over the longer run with the Federal Reserve’s statutory
mandate.”

“Communicating this inflation goal clearly to the public helps keep
longer-term inflation expectations firmly anchored, thereby fostering
price stability and moderate long-term interest rates and enhancing the
Committees ability to promote maximum employment in the face of
significant economic disturbances,” the FOMC statement added.

The FOMC shyed from also giving an unemployment target and
explained its reasons for not doing so.

“The maximum level of employment is largely determined by
nonmonetary factors that affect the structure and dynamics of the labor
market,” it said. “These factors may change over time and may not be
directly measurable.”

“Consequently, it would not be appropriate to specify a fixed goal
for employment; rather, the Committee’s policy decisions must be
informed by assessments of the maximum level of employment, recognizing
that such assessments are necessarily uncertain and subject to
revision.”

“The Committee considers a wide range of indicators in making these
assessments. Information about Committee participants’ estimates of the
longer-run normal rates of output growth and unemployment is published
four times per year in the FOMC’s Summary of Economic Projections,” hte
statement went on. “For example, in the most recent projections, FOMC
participants’ estimates of the longer-run normal rate of unemployment
had a central tendency of 5.2% to 6.0%, roughly unchanged from last
January but substantially higher than the corresponding interval several
years earlier.”

Despite recent upbeat economic signs, the FOMC participants once
again revised down their forecasts for economic growth — to 2.2 to 2.7%
in 2012; 2.8 to 3.2% in 2013 and to 3.3 to 4.0% in 2014.

Oddly, despite these slower growth projections, the policyhmakers
also revised lower their unemploymetn rate forecasts — to 8.2 to 8.5%
in 2012; 7.4 to 8.1% in 2013 and to 6t.7 to 7.6% in 2014.

The PCE inflation rate, which is seen as running 1.7% to 2.0% in
the “longer run” is projected to run below that range this year — 1.4%
to 1.8%. Next year, it is expected to run 1.4% to 2.0% and in 2014, it
is foreast at 1.6% to 2.0%.

Fed Chairman Ben Bernanke is now elaborating in his news
conference.

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