Fed to keep interest rate near zero for 2 years

WASHINGTON (AP) -- The Federal Reserve said Tuesday that it will likely keep interest rates at record lows for the next two years after acknowledging that the economy is weaker than it had thought and faces increasing risks.

The Fed announced that it expects to keep its key interest rate near zero through mid-2013. It has been at that record low since December 2008. The Fed had previously only said that it would keep it low for "an extended period."

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.

But it didn't seem to help on Tuesday. Stocks initially fell after the statement was released, possibly reflecting disappointment that the Fed did not announce another round of bond buying.

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.

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.

Ron Paul says Bernanke ducks the issue

Rep. Ron Paul, the Federal Reserve’s most powerful critic, reacts to Ben Bernanke’s press conference. Here’s a lightly edited transcript of his remarks to the MarketWatch Radio Network. Paul is the chairman of the House monetary policy subcommittee, and is thinking of running for president again in 2012.

WASHINGTON (MarketWatch) — I found the press conference to be enlightening in the fact that we heard one, and he held one, and that’s a sign that the Fed knows that they have to be a little more responding to the demand for transparency. When I listened to what had to be said, I wasn’t too enthralled. I’ve heard it all before. Read more on Bernanke's press conference.

It’s smooth talking, to make current policy sound reasonable, and let it go at that. Because they never admit anything. When it comes to prices, it’s never their fault. I mean, how many different things did he mention about why prices go up, why we have inflation? He never admits it’s the inflation of the money supply that’s the problem.
When he was asked about the dollar, he said, “Well you know, the person in charge for the value of the dollar is the secretary of the Treasury.” Well, Bernanke can triple the money supply, and then he wants to duck the issue that he’s responsible.
He says, “Our position is a strong dollar” ... with constant devaluation, even while he spoke it was devaluing. Against gold, it went down 1.5%. It doesn’t make any sense.

It was more justification for a policy that doesn’t work. There was no explanation on how he’s going to get out of this. He did recognize, though, that price increases are significant and could be a problem in the future. It could be a significant problem for unemployment. He said it softly, but there were some words in there that convinced me that he knows that when inflation is admitted – I think it’s already here – but when he really admits it’s here, he’s really in a box. Because what he’ll have to do is raise interest rates, cut back on all the monetization of all this debt, buying all these securities, and then, in a weak economy, he’s in a mess
He works on the Keynesian assumption that prices go up for other reasons than the monetary reasons.
“It’s the supply and demand...Well, third-world nations are starting to buy more oil, that’s why the price of oil goes up.” And it has nothing to do with the inflation of the monetary system.
So, I think he does a good job for what he has to do, and that is try desperately to make a very, very failed system sound plausible. But from my viewpoint, it isn’t plausible, it’s not workable.
And I so strongly oppose centralized economic planning through monetary policy, especially in a small little group that can manipulate interest rates and the money supply and bail out privileged companies that are too big to fail at the same time the little people suffer. They lose their jobs and their mortgages and their houses.
So, to me, we have to have major monetary reform, and a bit of transparency. A pretense of transparency won’t suffice.

Gold futures gain as much as $10 ahead of Fed

SAN FRANCISCO (MarketWatch) — Gold futures gained as much as $10 an ounce Wednesday as investors looked ahead to the Federal Reserve’s monetary-policy decision and Fed Chairman Ben Bernanke’s press conference due later in the trading day for clues on inflation.

“A weakening dollar and rising inflationary concerns have supported the recent rally in gold,” analysts at ICICI Bank said in a morning note to clients. “Investors are likely to look for further cues from [the] U.S. Fed meeting that concludes later today.”

Gold for June delivery (COMMODITIES:GCM11)  touched a high of $1,513.60 an ounce on the Comex division of the New York Mercantile Exchange, though it’s pulled back slightly to $1,512.40, up $8.90.
On Tuesday, prices closed lower for the first time in nine sessions.
The Federal Open Market Committee is scheduled to announce its rate decision at 12:30 p.m. Eastern time. It’s expected to stick to its target federal funds rate of between 0% and 0.25% and its goal of buying $600 billion in Treasury securities by the end of June. Read more about what’s expected from the Fed meeting

For the metals market, overall sentiment is “subdued” as traders await the Fed statement, “which will likely determine mid-term direction given recent dollar-related movements,” analysts at TheBullionDesk.com said in a report issued Wednesday.
At last check, the dollar index (BOARD:DXY) , which measures the U.S. currency against a basket of six rivals, traded at 73.717, down from 73.789 in late North American trading Tuesday. Read the currencies story.
In the short term, both gold and silver are “vulnerable to corrections given the scale of long exposure, particularly if the Fed signals an imminent start of monetary tightening,” they said.
But “we think the Fed is more likely to maintain its current stance,” they said. “And given the broader issues of inflation, heightened Eurozone debt issues and MENA [Middle East North Africa] unrest, we expect dip-buying to underpin precious metals and maintain the current uptrend.”
Silver for May delivery (COMMODITIES:SIK11)  was up 72 cents at $45.77 an ounce. The contract had closed lower on Tuesday to end an eight-session winning streak.
June palladium (NEW:PAM11)  was also up 65 cents at $756.35 an ounce and July platinum (NEW:PLN11)  tacked on $8 to $1,813.40 an ounce, but May copper (COMMODITIES:HGK11)  fell 4.95 cents to $4.27 a pound