WASHINGTON - The Federal Reserve said yesterday that it would keep interest rates near zero through 2014 or longer to help boost the economy and for the first time set an explicit inflation target of 2 percent, signaling that the central bank is frustrated with the weak pace of growth.
The decision to maintain extraordinarily low interest rates extends the Fed’s earlier time frame by 18 months, and in a news conference after the announcement, Ben Bernanke, the chairman, said the central bank was prepared to take more action if necessary to keep the economy moving. Bernanke did not say what tools the Fed might use, but in the future it could, for example, buy up additional mortgage assets to drive down rates.
By announcing an inflation target of 2 percent, Bernanke said the Fed believed that making the public more aware of what was behind the central bank’s decisions would help ease financial conditions and maintain price stability. He said the Fed was not concerned about rising inflation.
The action on interest rates reflects Fed projections that the unemployment rate is likely to remain above 7 percent for three more years, but it did not say how far the jobless rate would have to drop before it considers tightening its monetary policy.
“The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market,’’ the Fed statement said. “These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment.’’
The vast majority of the Fed leaders agreed with the decision on interest rates. Eleven Fed leaders said it is appropriate to start raising rates in 2014 or beyond; just six said it is more appropriate to raise rates this year or next. Previously the Fed said it would keep interest rates near zero through mid-2013.
Most Fed leaders also suggested that when the central bank does act to raise interest rates, it should do so very gradually. Most believe that interest rates should still be well below 1 percent at the end of 2014, according to the projections.
The Fed’s predictions for economic growth, inflation, and the unemployment rate stayed largely unchanged since the November meeting. The Fed slightly reduced its projections for economic growth this year to between 2.2 percent and 2.7 percent, though it predicted a slightly better unemployment rate of 8.2 percent to 8.5 percent.
The Fed said it expects inflation to come in slightly below 2 percent, which it generally regards as appropriate.
The Fed has been under intense pressure to take major new steps to drive economic growth, but it did not announce any significant new measures to do so. Instead, the Fed added new language to its closely watched policymaking statement, pledging to be “highly’’ supportive of economic growth.
The Fed noted that “the economy has been expanding moderately’’ and that there has been “further improvement in overall labor market conditions,’’ underscoring recent drops in the nation’s unemployment rate. But the central bank also highlighted persistent challenges, including the depressed housing market and financial crises abroad, that stand in the way of a more rapid economic recovery.