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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 .

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:

Federal Reserve Chair Ben Bernanke made the case for government support for research and development yesterday. Speaking at The Conference Board 's New Building Blocks for Jobs and Economic Growth conference, Bernanke said that "innovation and technological change are undoubtedly central" to economic growth and widening prosperity. And he argued that government has a key role in sparking innovation: Governments in many countries directly support scientific and technical research, for example, through grant-providing agencies (like the National Science Foundation in the United States) or through tax incentives (like the R&D tax credit). In addition, the governments of the United States and many other countries run their own research facilities, including facilities focused on nonmilitary applications such as health. The primary economic rationale for a government role in R&D is that, absent such intervention, the private market would not adequately supply certain types of research.3 The argument, which applies particularly strongly to basic or fundamental research, is that the full economic value of a scientific advance is unlikely to accrue to its discoverer, especially if the new knowledge can be replicated or disseminated at low cost. For example, James Watson and Francis Crick received a minute fraction of the economic benefits that have flowed from their discovery of the structure of DNA. If many people are able to exploit, or otherwise benefit from, research done by others, then the total or social return to research may be higher on average than the private return to those who bear the costs and risks of innovation. As a result, market forces will lead to underinvestment in R&D from society's perspective, providing a rationale for government intervention. Read the full speech here .

Ben Bernanke made something of a stand today at the Central Banking Conference in Frankfurt today. The Federal Reserve chair defended Fed policy, and called for more international "cooperation." While the AFP interprets his remarks largely as a response to criticism over the Fed's quantitative easing measures from German officials, Bernanke also took some carefully worded aim at China: It is striking that, amid all the concerns about renewed private capital inflows to the emerging market economies, total capital, on net, is still flowing from relatively labor-abundant emerging market economies to capital-abundant advanced economies. In particular, the current account deficit of the United States implies that it experienced net capital inflows exceeding 3 percent of GDP in the first half of this year. A key driver of this "uphill" flow of capital is official reserve accumulation in the emerging market economies that exceeds private capital inflows to these economies. The total holdings of foreign exchange reserves by selected major emerging market economies, have risen sharply since the crisis and now surpass $5 trillion--about six times their level a decade ago. China holds about half of the total reserves of these selected economies, slightly more than $2.6 trillion. It is instructive to contrast this situation with what would happen in an international system in which exchange rates were allowed to fully reflect market fundamentals. In the current context, advanced economies would pursue accommodative monetary policies as needed to foster recovery and to guard against unwanted disinflation. At the same time, emerging market economies would tighten their own monetary policies to the degree needed to prevent overheating and inflation. The resulting increase in emerging market interest rates relative to those in the advanced economies would naturally lead to increased capital flows from advanced to emerging economies and, consequently, to currency appreciation in emerging market economies. This currency appreciation would in turn tend to reduce net exports and current account surpluses in the emerging markets, thus helping cool these rapidly growing economies while adding to demand in the advanced economies. Moreover, currency appreciation would help shift a greater proportion of domestic output toward satisfying domestic needs in emerging markets. The net result would be more balanced and sustainable global economic growth. Given these advantages of a system of market-determined exchange rates, why have officials in many emerging markets leaned against appreciation of their currencies toward levels more consistent with market fundamentals? The principal answer is that currency undervaluation on the part of some countries has been part of a long-term export-led strategy for growth and development. This strategy, which allows a country's producers to operate at a greater scale and to produce a more diverse set of products than domestic demand alone might sustain, has been viewed as promoting economic growth and, more broadly, as making an important contribution to the development of a number of countries. However, increasingly over time, the strategy of currency undervaluation has demonstrated important drawbacks, both for the world system and for the countries using that strategy. Read the speech here .

While we're on the topic of the Federal Reserve (yet again), we need to share this new graphic from the folks at Wall Street Journal 's Real Time Economics . They have put together a very helpful visualization of the Fed's balance sheet, in order to help us, as Phil Izzo writes, "track the Fed's actions." It looks something like this: Click here to go to the Wall Street Journal's site and use the interactive graphic.

Federal Reserve Chair Ben Bernanke spoke yesterday at the American Economic Association annual meeting, in Atlanta, and he defended the Fed against the claim "that excessively easy monetary policy by the Federal Reserve in the first half of the decade helped cause a bubble in house prices in the United States, a bubble whose inevitable collapse proved a major source of the financial and economic stresses of the past two years." Among the issues Bernanke addresses in his defense of Fed policy is the oft-repeated charge "that monetary policy was too easy during the period from 2002 to 2006." The aggressive monetary policy response in 2002 and 2003 was motivated by two principal factors. First, although the recession technically ended in late 2001, the recovery remained quite weak and "jobless" into the latter part of 2003. Real gross domestic product (GDP), which normally grows above trend in the early stages of an economic expansion, rose at an average pace just above 2 percent in 2002 and the first half of 2003, a rate insufficient to halt continued increases in the unemployment rate, which peaked above 6 percent in the first half of 2003. 3 Second, the FOMC's policy response also reflected concerns about a possible unwelcome decline in inflation. Taking note of the painful experience of Japan, policymakers worried that the United States might sink into deflation and that, as one consequence, the FOMC's target interest rate might hit its zero lower bound, limiting the scope for further monetary accommodation. FOMC decisions during this period were informed by a strong consensus among researchers that, when faced with the risk of hitting the zero lower bound, policymakers should lower rates preemptively, thereby reducing the probability of ultimately being constrained by the lower bound on the policy interest rate. Bernanke also took on the question of whether the Fed funds rate being, on average, 200 points below the values "implied by the Taylor rule" proves that monetary policy was too easy. ( click here for a slide of the Fed funds rate vs the Taylor Rule values). Bernanke argues that a fair assessment of the Fed's approach requires a comparison with the an adjusted, or alternative Taylor rule. Here's a slide Bernanke used during this portion of the speech: Bernanke: The distinction between current and forecast values does not always matter much, as (for example) high levels of inflation or output today may signal high levels of those variables in the future. However, over the past decade, the distinction between current and forecast inflation has been an important one. On several occasions during this period, surges in energy prices led to increases in overall inflation. According to the standard Taylor rule, whose policy prescription depends on the current value of inflation, these episodes should have led to a significant tightening of monetary policy. However, both the FOMC and private forecasters expected these increases in energy prices to subside--correctly, as it turned out--and therefore did not much adjust their medium-term forecasts for inflation. Consequently, policy was not tightened as much as would have been called for by the standard Taylor rule. Put another way, the standard Taylor rule makes no distinction between increases in inflation expected to be temporary and those expected to be longer lasting. In practice, however, policymakers have responded less to increases in inflation that they expect to be temporary, a reasonable strategy given that monetary policy affects inflation only with a significant lag. Slide 4 (above) shows the quantitative implications of this point. The actual paths of the policy rate, in blue, and the policy prescription implied by the standard Taylor rule, the dashed red line, are the same as in Slide 3. Also shown, as a dotted green line, is the monetary policy path prescribed by an alternative version of the Taylor rule that replaces the current rate of inflation on the right-hand side with a forecast of inflation over the current and subsequent three quarters. Forecasts are those that were actually made in real time, that is, at the time at which the corresponding policy rate was chosen. Read the full speech here .

The Federal Reserve enters its second day of the end-of-year policy meeting today with the news that Chairman Ben Bernanke is Time Magazine 's Person of the Year for 2009. Something tells us that Bernanke and the members of the Federal Open Market Committee will be able to keep their minds on the business at hand, as most economists and policy analysts expect the Fed to stick to what Reuters calls the current "super loose monetary policy stance." But as readers wait for a pronouncement later today, Time has a series of articles online about Bernanke and the Fed that are worth reading (and a photo gallery of Bernanke going back to his childhood as "the nerd from Dillon, South Carolina"). And this is not one of those "Person of the Year" selections based on the winner's sheer publicity. Time's editors are clearly crediting Bernanke with preventing the recession from getting worse. As Richard Stengel , Time's managing editor, writes: One scholar has written that the Great Depression of the 1930s could have been averted if the Federal Reserve at the time hadnt constricted the money supply, let a third of American banks go under and told Americans to tighten their belts. That scholar, Ben Bernanke, just happened to be chairman of the Federal Reserve when the economy this year appeared to be headed for a repeat performance. We've rarely had such a perfect revision of the cliché that those who do not learn from history are doomed to repeat it. Bernanke didn't just learn from history; he wrote it himself and was damned if he was going to repeat it. Bernanke decided to do the opposite of what the Fed did back in the '30s: he would loosen the money supply as far as it would go, he would save as many banks as he could, and he wasnt going to hector the American public about pulling up their socks. Read the full tribute to Bernanke here . And also be sure to read the Q&A between Time editors and Bernanke here .

Fed Chair Ben Bernanke took to Capitol Hill yesterday to defend his record as the nation's top central banker. The White House nominated Bernanke for another term, and the Senate banking committee is his first stop in getting confirmation for another term by the Senate. He took a series of shots from Senators across the political spectrum. Jim Bunning (R-KY) told Bernanke "your time as Fed chairman has been a failure." Bernanke defended his record, and told the committee that the Fed's actions helped the nation avoid a much larger economic catastrophe: We played a central role in efforts to quell the financial turmoil, for example, through our joint efforts with other agencies and foreign authorities to avert a collapse of the global banking system last fall; by ensuring financial institutions adequate access to short-term funding when private funding sources dried up; and through our leadership of the comprehensive assessment of large U.S. banks conducted this past spring, an exercise that significantly increased public confidence in the banking system. We also created targeted lending programs that have helped to restart the flow of credit in a number of critical markets, including the commercial paper market and the market for securities backed by loans to households and small businesses. Indeed, we estimate that one of the targeted programs--the Term Asset-Backed Securities Loan Facility--has thus far helped finance 3.3 million loans to households (excluding credit card accounts), more than 100 million credit card accounts, 480,000 loans to small businesses, and 100,000 loans to larger businesses. And our purchases of longer-term securities have provided support to private credit markets and helped to reduce longer-term interest rates, such as mortgage rates. Taken together, the Federal Reserve’s actions have contributed substantially to the significant improvement in financial conditions and to what now appear to be the beginnings of a turnaround in both the U.S. and foreign economies. David Wessel , economics editor for the Wall Street Journal, has spent the last few years studying the Fed closely for his book, In Fed We Trust: Ben Bernanke’s War on the Great Panic. In a recent interview with Big Think , he spoke about how the Fed's response to the global economic crisis has largely worked, but still contains some risk and uncertainty: You can watch the full interview with Wessel here . And you can watch yesterday's Senate hearings here .