In a speech yesterday, the Fed's #2 official, Federal Reserve Vice Chair Janet Yellen, said that the federal funds rate may need to stay near zero until early 2016. She also strongly supported combinations of unemployment rate and inflation thresholds to guide future policy decisions. As mentioned in this Reuters article, Yellen is seen as a "front-runner to succeed Fed Chairman Ben Bernanke when his term expires in January 2014." So this speech may have long-term implications on what we can expect from the Fed for the next decade.
Yellen's full speech is available at this Federal Reserve webpage. Here's an excerpt which describes why she thinks the federal funds rate may need to be kept near zero until 2016. The excerpt references this chart:
The optimal policy to implement this "balanced approach" to minimizing deviations from the inflation and unemployment goals involves keeping the federal funds rate close to zero until early 2016, about two quarters longer than in the illustrative baseline, and keeping the federal funds rate below the baseline path through 2018. This highly accommodative policy path generates a faster reduction in unemployment than in the baseline, while inflation slightly overshoots the Committee's 2 percent objective for several years.
Here's an excerpt in which Yellen discusses inflation and unemployment thresholds:
Several of my FOMC colleagues have advocated such an approach, and I am also strongly supportive. The idea is to define a zone of combinations of the unemployment rate and inflation within which the FOMC would continue to hold the federal funds rate in its current, near-zero range. For example, Charles Evans, president of the Chicago Fed, suggests that the FOMC should commit to hold the federal funds rate in its current low range at least until unemployment has declined below 7 percent, provided that inflation over the medium term remains below 3 percent. Narayana Kocherlakota, president of the Minneapolis Fed, suggests thresholds of 5.5 percent for unemployment and 2.25 percent for the medium-term inflation outlook.
In this Reuters graphic of the Fed, Yellen is shown to be more of an inflation dove than Chairman Bernanke. Not only are doves more concerned with unemployment than with inflation, but they think that monetary policy is capable of greatly impacting unemployment. Inflation hawks are not only more concerned with inflation, but they are skeptical about the effectiveness of monetary policy in reducing the unemployment rate.
This is another indication that low rates may be with us for a very long time. And there are other signs that it may be even longer. One economist says history "suggests interest rates may continue falling until 2022". However, it's possible that rates could rise even with a weak economy. DA member Lou made a valid point in the comments that we "should not discount the possibility of high inflation and/or bond vigilantes forcing rates to go higher. Greece, Spain and some other countries have very high unemployment rates and little or no growth while also having very high interest rates." This possibility was mentioned in an open letter to Congress and the President by 15 of the nation's top financial CEOs. On the other hand, some economists claim that the U.S. doesn't have to worry about bond vigilantes forcing higher rates.
No one knows the future and how long these low interest rates will last. As I mentioned last week CD ladders have a long history of providing a sound strategy for the low-risk part of one's portfolio, and it doesn't require interest-rate predictions.
Update 2:45pm: The Fed has released last month's FOMC minutes. As described in this Calculated Risk blog article, "It seems very likely that the Fed will adopt a threshold rule for the Feds Fund Rate based on inflation and unemployment, and remove the forward guidance sentence from the statement at the December 11th and 12th meeting".