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Fed chief Bernanke expects extended hold on interest rates

By Neil Irwin
Washington Post Staff Writer
Thursday, February 25, 2010; A18

Expect ultra-low interest rates from the Federal Reserve for some time to come, Chairman Ben S. Bernanke said Wednesday.

Last week, the Fed surprised some in financial markets by raising the discount rate, at which banks take out emergency loans, by a quarter-percentage point. The Fed made clear in its Feb. 18 statement -- and in subsequent speeches by several officials -- that the move was neither expected to increase borrowing costs for the public nor meant to presage increases in other interest rates.

But some in the financial markets didn't quite get the message and were scrutinizing Bernanke's semiannual testimony on the economy and monetary policy for signs that increases in interest rates could be on the horizon.

They didn't find any.

"The federal funds rate is likely to remain exceptionally low for an extended period," Bernanke said, repeating language that has been in every Fed statement on monetary policy for the past 14 months. The sense that rates will remain low helped drive the stock market up, with the Standard & Poor's 500-stock index closing Wednesday with a 1 percent gain.

Bernanke's description of the economy suggested wariness about the strength of the recovery, which would also give the Fed reason to maintain its policies to try to strengthen growth.

Although the economy's rate of growth was about 4 percent in the second half of 2009, that was driven by businesses slowing their reduction of inventories, he said.

"As the impetus provided by the inventory cycle is temporary and as the fiscal support for economic growth will likely diminish later this year, a sustained recovery will depend on continued growth in private-sector final demand for goods and services," Bernanke said. "The job market remains quite weak."

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