Fed to keep interest rate near zero for 2 years

The Federal Reserve said it will likely keep interest rates at record lows for the next two years, after acknowledging that the economy is weaker than Fed officials had thought and faces increasing risks. The Fed announced that it expects to keep its key interest rate near zero through mid-2013; it has been at that record low since December 2008. The Fed had previously said only that it would keep the rate low for “an extended period.” Fed policymakers used significantly downbeat language to describe current economic conditions: So far this year, the economy has grown “considerably slower” than the Fed had expected; temporary factors, such as high energy prices and the Japan crisis, only accounted for “some of the recent weakness” in economic activity, they said. The more explicit time frame is aimed at calming nervous investors. The Fed’s description offers them a clearer picture of how long they will be able to obtain ultra-cheap credit, and mid-2013 is at least a year longer than many economists had expected. The Fed’s response didn’t seem to help the market today, though. Stocks initially fell after the statement was released, possibly reflecting disappointment that the Fed did not announce another round of bond buying. However, U.S. stock markets closed sharply higher after a volatile day of trading. The Dow Jones industrial average closed up 4%, or 430 points, while the S&P 500, a broader measure of stocks, rose 4.8%, or 53 points. Fed officials met against a backdrop of speculation that they would say or do something new to address a darkening economic picture. The stock market has plunged and government data have signaled a weaker economy in the four weeks since Chairman Ben Bernanke told Congress that the Fed was ready to act if conditions worsened.