On Wednesday, January 25, the U.S. Federal Reserve said it would keep interest rates at their current exceptionally low level until the end of 2014. Forget about the middle of 2013, which seemed extremely far away when the Fed made that “guarantee” in August. And forget about the beginning or middle of 2014. Now the Fed is talking about the end of 2014.

Almost three years from now. Three years with short-term interest rates near 0%.

Let’s cut straight to the chase for investors: Who wins and who loses from this extraordinary statement of policy by the U.S. central bank? Read more

Fed surprise as central bank says it will keep rates exceptionally low through end of 2014

Actually something of a surprise from the Federal Reserve’s Open Market Committee today.

The committee decided to keep its target rate for short-term interest rates at 0% to 0.25%.

No surprise there.

But then it said it anticipated keeping rates at that exceptionally low level through at least late 2014. Previously the Fed had said “though mid-2013.” Read more

Federal Reserve does nothing and the markets aren’t happy

I guess financial markets were looking for the Federal Reserve to dump billions into bonds and stocks today.

At least that’s what I conclude from the drop in stock prices this afternoon after the Federal Reserve’s Open Market Committee gave no indication that it was about to open the floodgates.

I don’t think the markets had any reason to believe that the Fed would decide to unleash a wave of bond buying on the markets. But the lack of a reason has never stopped markets from dreaming. And right now most investors—I know I feel this—would like someone to do something to stop the pain.

The statement from the Open Market Committee actually sounded relatively optimistic. (Granted that when most voices are calling for the end of the world, it doesn’t take much to sound optimistic.) “Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth,” the Fed said. “The Committee continues to expect a moderate pace of economic growth over coming quarters”

Given that view, the Federal Reserve decided to stay on the current course. The Fed will continue its current policy of buying longer maturity Treasuries when short-term Treasuries in its portfolio mature. Read more

Brazil cuts interest rates and taxes to head off hard landing for its economy

The same day, November 30, that the People’s Bank of China reduced the amount of cash that big banks have to keep on reserve to 21% from a record 21.5%, the Banco Central do Brasil cut actual interest rates for a third straight meeting. Today, December 1, the Brazilian government suspended a tax on foreign investment, and cut taxes on appliances, food staples, and consumer credit.

The goal of all this is to reverse a drop in Brazil’s growth rate that has started to worry the central bank and Brazil’s government—especially because the slowdown in European economies is expected to accelerate in 2012 with a good chance that the EuroZone will slip into recession. Brazil’s economy is forecast to grow at just a 3.1% rate in 2011. That’s quite a drop from the 7.5% growth of 2010.

Brazil’s central bank had raised interest rates to 12.5% in an effort to slow growth and reduce inflation to the bank’s target range of 4% plus or minus two percentage points. But now, even though inflation is still not under control (the annual rate of inflation was 6.69% in October), the bank has decided that the danger of Brazil’s economy stalling is great enough to reverse policy and begin cutting interest rates.

Yesterday’s move brings the benchmark Selic rate to 11%. In its post-meeting statement the bank signaled that this wouldn’t be the last cut either. The futures market is now pricing in a benchmark interest rate of 9.25% by July.

The Banco Central do Brasil didn’t give a growth target when it cut interest rates yesterday but the government did when it cut taxes today. The goal is to produce 5% growth in 2012 even with the slowdown in the global economy.

Like China, Brazil has decided to move to lower the odds of a hard landing for its economy.

Lack of inflation in October leaves Fed free to act

Consumer inflation declined in the United States in October by 0.1%. That was the first drop since June. The core inflation number, which excludes food and energy, climbed 0.1% in October.

I wouldn’t make too much of this number—for reasons that I’ll explain later—but it is good news. A decline in inflation, for whatever reason, gives consumers a bit more spending power going into the holiday shopping season.

The absence of inflation also means that the Federal Reserve can concentrate on stimulating the economy—QE3 anyone?–without the constraints imposed by worries about letting inflation get out of control. And there’s certainly nothing in these numbers to endanger the Fed’s pledge to keep its benchmark interest rate near 0% until mid 2013.

You don’t have to look far for the reason for the October drop in inflation. Energy prices fell 2% in October from September. That’s largely an artifact of the way that the Bureau of Labor Statistics conducts its price surveys. The government statisticians examine consumer prices during a single week in the month. In September that week happened to correspond to a small surge in gas prices—the major reason that inflation rose by 0.3% in September from August. In October the sample week saw prices considerably lower than those in that week in September.

I don’t think, therefore, that you can use the October drop to conclude that inflation is falling in the long run. But I think it is safe to say that inflation isn’t about to run out of control—and that deflation isn’t a danger either at the moment.

What’s called headline inflation climbed by 3.5% from October 2010. But core inflation, the number the Federal Reserve watches, rose at just a 2.1% rate from October 2010. The Fed’s inflation target is 2% or less.