Tales from the Trail

Some great news for all you borrowers today from the Fed. Interest rates are likely to remain around zero until at least late 2014. That’s later than previously expected, and to put things in perspective, it’s nearly two years into the term of the president who will be elected in November.

What it tells us is that the economy is still very vulnerable. Ben Bernanke said as much today: “I don’t think we’re ready to declare that we’ve entered a new, stronger phase at this point.” He left the door wide open to further Fed stimulus via bond purchases.

And Bernanke was almost apologetic about what this interest rate outlook means for another large swathe of the population: the savers. Take Maggie Smith, not the actress but a 74-year-old from New Jersey who watches her interest income on savings stagnate while home and car costs go up. After more than five years of rock-bottom rates, it’s no wonder she feels like she’s “being punished” for being prudent.

Here are our top stories from Washington…

Bernanke says Fed pondering further stimulus

Federal Reserve Chairman Ben Bernanke signaled the U.S. central bank may consider further monetary easing, after the central bank announced interest rates would remain near zero until late 2014. Bernanke also suggested the Fed might be willing to tolerate inflation above its newly unveiled official target of 2 percent if it means putting a dent in high unemployment.

For more of this story by Pedro da Costa and Mark Felsenthal, read here.

For a snap analysis by Mark Felsenthal, read here.

Insight: Today it pays to owe money, while U.S. savers suffer

Sometimes Maggie Smith worries that she may outlive her savings.”It’s an uncomfortable feeling to realize that everything is going up except your income,” said the 74-year-old from New Jersey. Rising home and car insurance costs forced her to dip into savings which have been earning less than 1.0 percent. That isn’t likely to change for some years. The Federal Reserve said it is likely to keep its key interest rate near zero until late 2014.

In the past few days we have seen the president and the chairman of the Federal Reserve both standing up and insisting they had more cards at their disposal to rescue the faltering American economy. In truth, though, both men look like they are holding weak hands, and are reduced, for the time being, to putting a brave face on things.

With short-term interest rates already at zero, Ben Bernanke has few cards he can play, and none of them feel like sure-fire winners. One is to restart an aggressive program of purchasing government securities to drive long-term interest rates down still further, another is to cut the interest rate on reserves, and a third, desperate measure would be to raise the inflation target. None of those cards are likely to be played unless things get significantly worse.

In theory President Barack Obama has more options at his disposal, but it is far from clear what he can actually get through Congress in election season. Today Obama promised that his economic team was “hard at work in identifying additional measures” to support the economy and boost hiring. But he had few new ideas to offer, besides extending tax cuts for the middle class that are set to expire this year, increasing government support for clean energy development, and rebuilding more U.S. infrastructure.