Fed to keep zero rates until inflation hits 2 percent: Citi

NEW YORK (BestGrowthStock) – The Federal Reserve will likely hold its policy rate target near zero until core inflation rises to at least 2 percent, analysts at Citigroup said on Friday.

The core rate on personal consumption expenditures (PCE), the Fed’s preferred inflation gauge, is running at 1 percent, far below the desired level among some Fed policy-makers. They deem this slow pace of price growth as a risk to the recovery, with the potential outcome a damaging spiral of falling prices, a phenomenon known as deflation.

Last Friday, Fed Chairman Ben Bernanke said Fed officials would like to see inflation at about 2 percent, rather than 1 percent or so right now.

Bernanke and other Fed policy-makers have expressed support for a second bout of Treasuries purchases, dubbed “QE2” by traders.

“Through speeches and hints in the media over the past four weeks, the intermediate goal of further monetary easing shifted from lowering long-term nominal rates to managing long-term inflation expectations,” analysts at Citigroup’s research and analysis unit said in a research report released on Friday.

They said the U.S. central bank will likely announce an initial commitment to buy $500 billion to $700 billion in bonds after its Nov 2-3 policy meeting — at a monthly clip of $100 billion.

St. Louis Fed President James Bullard said on Thursday he would back Fed purchases of Treasuries in $100 billion increments meeting-by-meeting if the Fed decides monetary easing is necessary, but stressed no decision has been made.

“Further, we expect the Fed to commit to keep rates low until core PCE breaches a certain threshold, say 2 percent,” they wrote.

Once core PCE crosses the 2 percent mark, the Citi analysts said the Fed might begin raising its target on the federal funds rate to 3.5 percent over a two-year period.

They noted that a 3.5 percent fed funds rate would be consistent with full employment and price stability at 2 percent.

In December 2008, the Fed adopted a zero to 0.25 percentage point target on the fed funds rate, which is the overnight rate that banks charge each other to borrow excess reserves.

The analysts said the bond market has largely priced in the forecast scenario outlined in the report.

(Reporting by Richard Leong; Editing by Jan Paschal)

Fed to keep zero rates until inflation hits 2 percent: Citi