Fed: Super-Low Rates Could Fuel Speculative Bubble

FILE - In this May 24, 2008 file photo, the headquarters of the Federal Reserve Bank is seen at...

FILE - In this May 24, 2008 file photo, the headquarters of the Federal Reserve Bank is seen at sunrise in Washington. The Federal Reserve says the unfolding recovery will probably be gradual, as modest growth keeps the nation's unemployment rate elevated over the next several years.(AP Photo/J. David Ake, file)

(AP)

The Federal Reserve doesn't expect the recovery will be strong enough to quickly drive down the jobless rate, and acknowledged its efforts to keep the rebound going could feed a new speculative bubble.

Record-low interest rates "could lead to excessive risk-taking in financial markets," according to documents released Tuesday of the Fed's closed-door meeting earlier this month. It also could cause consumers, investors and businesses to worry about inflation taking off.

Although Fed officials saw the current likelihood of that as "relatively low," they pledged to "remain alert to these risks."

At the Nov. 3-4 meeting, Fed Chairman Ben Bernanke and his colleagues kept the target range for its bank lending rate at zero to 0.25 percent.

Fed policymakers also pledged to hold rates at such super-low levels for an "extended period," to ensure the recovery gains traction. Most analysts predict that means rates will stay where they are through the rest of this year and into part of 2010.

On the economy, the Fed expects the unfolding recovery will be gradual, as modest growth keeps the nation's unemployment rate elevated over the next several years.

Most Fed policymakers said it could take "five or six years" for the economy and the labor market to be consistently healthy.

High unemployment, slow income growth and hard-to-get credit will weigh on consumer spending "for some time to come," the Fed said. Troubles in the commercial real-estate market also will restrain the recovery, according to minutes of the November meeting.

Fed officials expected the pace of the recovery "would be rather slow, relative to historical experience." Recoveries after steep economic downturns are usually robust, the Fed said.

In updated economic projections, the Fed said the economy's contraction for all of this year won't be as deep as it thought in a forecast released in the summer. That's because the second half of this year is shaping up better than anticipated.