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Bernanke Pledges to Keep Rates Low Thru 2014: A “Very Pessimistic” Outlook, Former Fed VP Says

·Editor in Chief

The Federal Reserve did not announce another round of quantitative easing Wednesday but still had a gift for the speculators.

In a surprising and somewhat perplexing move, the FOMC announced plans to keep rates at "exceptionally low levels" -- a.k.a. zero -- through 2014 "at least" vs. mid-2013 previously.

The promise of an extra year (plus!) of easy money prompted traders to put the "risk" trade back on. Stocks, Treasuries and commodities rallied while the dollar declined in response to the announcement. In recent trading, the Dow was up 0.6% to 12,750 after trading as low as 12,580 earlier in the day.

The only thing tempering the euphoria among traders is the implications of the Fed's forecast.

Keeping rates low until 2014 is "good policy [only] if you believe the recovery is going to be very weak and weak globally," says Gerald O'Driscoll, former vice president and economic adviser at the Dallas Fed and currently a senior fellow at the Cato Institute. "If they really think they can project weak growth that far out, then they're saying...the U.S. economy is becoming like the Japanese, no growth for long period of time. That's very pessimistic."

O'Driscoll, for one, does not share that view and fears the Fed is "tying its hands" in the event the economy, and inflation, review faster or more strongly than expected. "The downside of being transparent is it will be transparent if you're wrong," he quips.

Worse Than Expected

Officially, the Fed's assessment of the economy was unchanged from its December statement:

The economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed.

But extending the pledge to keep rates low through 2014 "would infer they have a somewhat pessimistic view, more pessimistic than heretofore about prospects for a recovery," Driscoll says.

Indeed, the Fed lowered its forecast for economic growth in its latest projections, released after the accompanying video was taped.

For 2012, FOMC members now project GDP growth of 2.2% to 2.7% vs. 2.5% to 2.9% back in November. The Fed also lowered its forecast for inflation and the unemployment rate, albeit still in an elevated range between 8.2% to 8.5%.

For the first time, the Fed today also released a breakdown of individual committee members' expectations for the fed funds rate: Of the 17 FOMC members, nine expect rates will remain below 1% through the end of 2014 and six predict rates will still be at zero into 2015.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.