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It looks as though interest rates will remain low for the next two years. At their January meeting, members of the Federal Open Market Committee not only kept the target federal funds rate between 0 and 1/4 percent, they, as a group, projected the next rate increase would likely not come until 2014 at the earliest. They also set the inflation target at 2%. Here is a look at the Fed's projections for GDP and unemployment: At his press conference following the meeting, Ben Bernanke noted that the Fed needs to remain open to measures to "provide further stimulus" if the pace of recovery slows: Read the FOMC January statement here .

In the latest Foreign Policy , Menzie Chinn and Jeffry Frieden argue on behalf of conditional inflation targeting. A little inflation would be welcome, they say, in that it would "reduce the debt burden to more manageable levels." They write: Today our highest priority should be to stimulate investment, growth, and employment. Raising the expected inflation rate will lower real interest rates and spur investment and consumption. It will also make it difficult for the de facto dollar peggers, such as China, to sustain their policies. The resulting real depreciation of the dollar would stimulate production of U.S. exports and domestic goods that compete with imports, boosting American production. The United States would get faster growth, an accelerated process of deleveraging, a quicker recovery, and a firmer foundation upon which to address long-term fiscal problems. To back up his assertion that a little inflation is not a threat, Chinn adds this graph of implied inflation at the Econbrowser blog. Do you agree with Chinn that fear of inflation is "unwarranted"? Read A Call for Action: Conditional Inflation Targetting here .

The Federal Open Market Committee has wrapped up its two day November meeting, and it appears there are no significant changes to monetary policy coming in the near future. The Fed will keep the federal funds target rate at 0 to 1/4 percent, as the committee anticipates recovery will continue at a slow pace. From the release: The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. Here's a look at the Fed's current projections for GDP and jobs: Read the full release here , and watch Fed Chair Ben Bernanke's press conference from the FOMC meeting below:

In his Money Watch column, Mark Thoma looks at the below graph and sees signs that the Fed will pursue further quantitative easing measures: Thoma writes: The Fed is very sensitive to and very fearful of deflation, and the fall in inflation expectations evident in the graph was one of the reasons the Fed decided to implement QE1. And as you can see from the graph, this (along with the other steps the Fed took at that time) turned the expectations around, at least for awhile. However, just before the dotted vertical line on the graph, expectations began falling again. What is the vertical line? It shows the point in time when QE2 was announced by Ben Bernanke (August 27 of 2010 at Jackson Hole, Wyoming), and once again inflation expectations turned around. However, notice that recently the trend has turned downward again and if this continues the Fed is likely to intervene once again. What do you see in the graph? Do monetary policy measures need to be taken? What are the lessons from QE1 and QE2? Read The Fed Is Laying the Groundwork for Further Easing here .

Calling the Fed's latest maneuvering, dubbed operation twist , extreme policy might seem a little, well, extreme. But that is exactly what the folks at Central Bank News have done in adding it to the list of the most extreme policy moves of 2011. Here's the list: 1. Belarus Financial Crisis 2. The Twist 3. Swiss Franc Floor 4. ECB SMP and the Confidence Crisis 5. Bank of Japan Earthquake Response 6. Vietnamese Hyperinflation 7. Brazilian Rate Reversal 8. Kiwi Earthquake Insurance 9. Joint Liquidity Operations 10. 'Chindia' Tightening For details of each of the policy moves listed above, read Top 10 Most Extreme Monetary Policy Moves of 2011 here .

In a New York Times op-ed, Paul Volcker expresses some concern that members of the Federal Reserv's Open Market Committee are starting to find the prospects of "a little inflation" tempting. The thinking that concerns Volcker is that 4 or 5% inflation might have a stimulating effect for the economy. Not so, says Volcker: My point is not that we are on the edge today of serious inflation, which is unlikely if the Fed remains vigilant. Rather, the danger is that if, in desperation, we turn to deliberately seeking inflation to solve real problems — our economic imbalances, sluggish productivity, and excessive leverage — we would soon find that a little inflation doesn’t work. Then the instinct will be to do a little more — a seemingly temporary and “reasonable” 4 percent becomes 5, and then 6 and so on. What we know, or should know, from the past is that once inflation becomes anticipated and ingrained — as it eventually would — then the stimulating effects are lost. Once an independent central bank does not simply tolerate a low level of inflation as consistent with “stability,” but invokes inflation as a policy, it becomes very difficult to eliminate. It is precisely the common experience with this inflation dynamic that has led central banks around the world to place prime importance on price stability. They do so not at the expense of a strong productive economy. They do it because experience confirms that price stability — and the expectation of that stability — is a key element in keeping interest rates low and sustaining a strong, expanding, fully employed economy. Read A Little Inflation Can Be a Dangerous Thing here .

Federal Reserve Chairman Ben Bernanke also took to the podium yesterday, albeit with a much, much smaller audience. He gave his outlook on the US Economy in Minneapolis, but he there was little in his speech to suggest any significant change in monetary policy. He did address increased gas and food prices in the context of inflation concerns: Prices of many commodities, notably oil, increased sharply earlier this year. Higher gasoline and food prices translated directly into increased inflation for consumers, and in some cases producers of other goods and services were able to pass through their higher costs to their customers as well. In addition, the global supply disruptions associated with the disaster in Japan put upward pressure on motor vehicle prices. As a result of these influences, inflation picked up significantly; over the first half of this year, the price index for personal consumption expenditures rose at an annual rate of about 3-1/2 percent, compared with an average of less than 1-1/2 percent over the preceding two years. However, inflation is expected to moderate in the coming quarters as these transitory influences wane. In particular, the prices of oil and many other commodities have either leveled off or have come down from their highs. Meanwhile, the step-up in automobile production should reduce pressure on car prices. Importantly, we see little indication that the higher rate of inflation experienced so far this year has become ingrained in the economy. Longer-term inflation expectations have remained stable according to the indicators we monitor, such as the measure of households' longer-term expectations from the Thompson Reuters/University of Michigan survey, the 10-year inflation projections of professional forecasters, and the five-year-forward measure of inflation compensation derived from yields of inflation-protected Treasury securities. In addition to the stability of longer-term inflation expectations, the substantial amount of resource slack that exists in U.S. labor and product markets should continue to have a moderating influence on inflationary pressures. Notably, because of ongoing weakness in labor demand over the course of the recovery, nominal wage increases have been roughly offset by productivity gains, leaving the level of unit labor costs close to where it had stood at the onset of the recession. Given the large share of labor costs in the production costs of most firms, subdued unit labor costs should be an important restraining influence on inflation. Read Bernanke's speech here .

In an op-ed for the Financial Times , Nouriel Roubini calls S&P's decision to downgrade the US credit rating "misguided," and he worries that it is making an already dangerous economic situation worse. Between the US economy's inability to add jobs, and the economic stagnation and debt struggles in Europe, Roubini is expecting another global recession. And he fears that this one might be significantly worse than the last. So can we avoid another severe recession? It might simply be mission impossible. The best bet is for those countries that have not lost market access - the US, UK, Japan, and Germany - to introduce new short-term fiscal stimulus while committing to medium-term fiscal austerity. The US downgrade will hasten demands for fiscal reduction, but America in particular should commit to look for significant cuts in the medium term, not an immediate fiscal drag that will worsen growth and deficits. Most western central banks should also introduce further QE, even though its effect will be limited. The European Central Bank should not just stop rate hiking: it should cut rates to zero and make big purchases of government bonds to prevent Italy or Spain losing market access - the outcome of which would be a truly major crisis, requiring doubling (or tripling) of bail-out resources, or debt workouts and a eurozone break-up. Read Mission impossible: stop another recession here .