WASHINGTON — The Federal Reserve, meeting this week, is likely to affirm its message that consumers and businesses will be able to borrow cheaply well into the future - even after unemployment has dropped sharply.
Last month, the Fed signaled for the first time that it will tie its policies to specific economic barometers. It said that as long as the inflation outlook is mild, it could keep short-term rates near zero until unemployment dips below 6.5 percent from the current 7.8 percent.
That could take until the end of 2015, the Fed predicted last month.
The Fed’s guidance was designed to give consumers, companies and investors a clearer sense of when superlow borrowing costs might start to rise. Though some key sectors of the economy are improving, analysts think the Fed still feels more time is needed for low rates to spur borrowing, spending and economic growth.
One reason is that many Americans remain anxious about the budget impasse in Washington.
“The Fed is dealing with a lot of uncertainty right now, with all the decisions still to be made on federal budget policy,” said Diane Swonk, chief economist at Mesirow Financial, who expects the Fed to makeno changes in its support programs when its two-day policy meeting ends Wednesday.
At its December meeting, the Fed said it would keep spending $85 billion a month on bond purchases to keep long-term borrowing costs down. It will continue its bond purchases until the job market improved “substantially.”
When it buys bonds, the Fed increases its investment portfolio and pumps more money into the financial system - something critics say could eventually ignite inflation or create dangerous bubbles in assets like real estate or stocks.
On Friday, when the government will release its jobs report for January, unemployment is expected to remain 7.8 percent. That still-high rate, 3 1/2 years after the recession officially ended, helps explain why the Fed has kept its key short-term rate at a record low near zero since December 2008, just after thefinancial crisis erupted.
In a speech in Ann Arbor, Mich., this month, Chairman Ben Bernanke said he thought too little progress had been made in reducing unemployment and signaled that the Fed’s aggressive support programs should continue.
“There is still quite a ways to go,” Bernanke said of the unemployment crisis. “There are too many people whose skills and talents are being wasted.”
Still, some private economists think the Fed will decide to suspend its bond purchases in the second half of this year. They note that the minutes of the Fed’s December meeting revealed a split: Some of the 12 voting members thought the bond purchases would be needed through 2013. Others felt the purchases should be slowed or stopped altogether before year’s end.
On one point, economists agree: Once the Fed does decide to scale back its stimulative policies, it will signal its intent well before it actually does so. Policymakers will want to blunt the shocks that could reverberate through financial markets, which have been influenced by the loose-credit policies the Fed has engineered for more than four years.
Interest rates have sunk to record lows. And stock prices have risen as many investors have shifted money into the stock market in search of better returns.
Business, Pages 25 on 01/30/2013