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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:

The Federal Open Market Committee expressed qualified confidence in the recovery. And the Federal Reserve will be keeping interest rates low, and will bring about an end of its second round of quantitative easing. From the FOMC release: Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter. The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability. Read the full press release here . Following the FOMC meeting, Fed chair Ben Bernanke spoke in a highly anticipated press conference. And he defended the Fed's decision to end QE2, saying that the policy was "never meant to be a cure-all." Here is a video excerpt from the Wall Street Journal : And for some interpretation of Bernanke's presser, we turn to MoneyWatch , where Mark Thoma discussed the Fed's latest announcements with MoneyWatch.com editors Eric Schurenberg, Jill Schlesinger and Jack Otter :

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 .

In his speech opening the Jackson Hole Conference , Ben Bernanke stated that "the Federal Reserve remains committed to playing its part to help the U.S. economy return to sustained, noninflationary growth." And he outlined a series of tools available to him and the Fed in countering further economic decline. (Read the speech here ). But Financial Times columnist Clive Crook argues that a "divided Fed" is "letting the country down" and needs to take additional monetary policy steps now: Mr Bernanke and his colleagues are understandably nervous about extending the radical measures they have already taken. Divided on the point, they have taken a modest further step by preventing the maturing of debt they hold from tightening monetary conditions, as it otherwise would have. They are right to worry about their exit strategy; they are also right to be nervous about being in uncharted terrain. But the balance of risks has moved. They need to go further. George Magnus of UBS argued on this page last week that deflation poses a greater risk for the US than inflation. That seems right: inflation expectations, as revealed by rates on index-linked US debt, are very low. Mr Magnus was surely correct to say this points to the need for further monetary easing – but wrong, I think, to say that “unreconstructed monetarists will not be persuaded”. His point was that monetarists would see the policy rate at zero and banks holding enormous reserves at the Fed and conclude that money was already too loose. As the monetary economist Scott Sumner has pointed out, Milton Friedman – name me a less reconstructed monetarist – talked of “the fallacy of identifying tight money with high interest rates and easy money with low interest rates”. When long-term nominal interest rates are very low, and inflation expectations are therefore also very low, money is tight in the sense that matters. When money is loose, inflation expectations rise, and so do long-term interest rates. Unreconstructed monetarists ought therefore to agree with Mr Magnus’s main point: under current circumstances, better to print money and be damned. Read It falls to the Fed to fuel recovery here .

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 .

Mark Thoma thinks Alan Greenspan and Ben Bernanke were wrong to give their opinions about fiscal policy during Congressional testimony. But he does think that the Fed chair should address the effect of fiscal policy on monetary policy: That is, while I don’t think the Fed chair should give advice on the specifics of fiscal policy, the chair should make clear how fiscal policy choices will affect or constrain monetary policy. Let me try to explain how monetary and fiscal policy are connected through the budget deficit. There are two different government budget issues to think about. The first concerns the long-run trajectory for the debt, and the projections are that the debt will expand to unsustainable levels if we don’t do something to stop it. That means, above all else, reducing the growth in health care costs. The second issue concerns the short-run debt created in an attempt to stimulate the economy. This is a small amount compared to the long-run debt problem, but it is still a lot of money and we will need to pay this back when things are back to normal (but not before then, since paying it back too soon could undermine a recovery). And Thoma goes on, in his Money Watch column, to look at "the long-run debt problems" as a way of exploring the potential challenges of the Fed moving forward. Read The Relationship Between Budget Deficits, Fed Independence, and Inflation .

Ben Bernanke delivered his Semiannual Monetary Policy Report to the Congress yesterday before the House Financial Services Committee , and he expressed a relatively upbeat view of the economy . He also defended the need for the Federal Reserve to hold onto independence in the face of proposals to give the General Accounting Office more auditing powers, saying "a perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability." Here is his opening statement, from Bloomberg : Bernanke will continue his testimony later today. Mark Thoma 's concern with the Fed these days has less to do with its independence as a whole, and more, it seems, with the independence of the district banks as currently structured: As it stands, the Board of Governors in Washington has considerable influence over who is appointed to key positions such as the President of the district banks, and those Presidents represent five of the twelve votes at the meetings where monetary policy is set. More independence of the district bank Presidents and other district bank personnel from the Board of Governors would be a healthy change (there is also a question of whether geographic representation through district banks is the best way to capture the public interest, but I'll leave that aside for now). Read Fed Independence here .