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Fed Holds Stimulus Steady, Citing ‘Moderate’ Growth Fed Holds Stimulus Steady, but Leaves Door Open for More
(about 2 hours later)
WASHINGTON – The Federal Reserve said on Wednesday that it would continue its stimulus campaign at the same pace it has maintained since December, neither increasing nor slackening its efforts, just as investors had expected. WASHINGTON – The Federal Reserve said Wednesday that its stimulus campaign would press forward at the same pace it has maintained since December, putting to rest for now any suggestion that it was leaning toward doing less.
The Fed said the economy was expanding at a “moderate pace” and that the labor market had shown “some improvement” in a statement released at the conclusion of a two-day meeting of its policy-making committee. The statement cited consumer spending and the rebounding housing market as points of strength, while noting that government spending cuts were “restraining economic growth.” The Fed, which has struck a more balanced tone in recent weeks as strong growth during the winter months has been followed once again by a disappointing spring, emphasized that it was ready to increase or decrease its efforts in a statement released after a two-day meeting of its policy-making committee.
It was the first time that the Fed has explicitly referenced the possibility of doing more in a policy statement, although officials including the Fed’s chairman, Ben S. Bernanke, have made the point repeatedly in their public remarks.
Analysts disagreed about the meaning. Some saw a signal that the Fed’s next move could be an expansion of its stimulus campaign. Others, however, said the Fed was simply underscoring that it did not plan to reduce its asset purchases. It is buying $85 billion a month in Treasury and mortgage-backed securities.
“I don’t think there’s much chance of them stepping it up,” said Jim O’Sullivan, chief United States economist at High Frequency Economics in New York. “But this is certainly their way of saying there’s no bias toward scaling down.”
The Fed has struck a more balanced tone in recent weeks as strong growth during the winter months has been followed once again by a disappointing spring. Is statement on Wednesday said that the economy was expanding at a “moderate pace” and that the labor market had shown “some improvement.”
It added, however, that government spending cuts were “restraining economic growth,” an implicit criticism of the rest of the federal government for impeding a faster recovery.
The statement also noted that the pace of inflation had slackened, a potential sign of economic weakness, but it showed little concern about that trend.The statement also noted that the pace of inflation had slackened, a potential sign of economic weakness, but it showed little concern about that trend.
The Fed said that it would continue to add $85 billion a month to its holdings of mortgage-backed and Treasury securities. It gave no indication of how much longer those purchases would continue, beyond its standard formulation that it wanted to see evidence that the labor market outlook had “improved substantially.”The Fed said that it would continue to add $85 billion a month to its holdings of mortgage-backed and Treasury securities. It gave no indication of how much longer those purchases would continue, beyond its standard formulation that it wanted to see evidence that the labor market outlook had “improved substantially.”
The statement won support from 11 of the committee’s 12 members. Esther George, the president of the Federal Reserve Bank of Kansas City, cast the sole dissenting vote, as she has at each meeting this year, citing concerns that the stimulus campaign could cause “economic and financial imbalances” and inflation.The statement won support from 11 of the committee’s 12 members. Esther George, the president of the Federal Reserve Bank of Kansas City, cast the sole dissenting vote, as she has at each meeting this year, citing concerns that the stimulus campaign could cause “economic and financial imbalances” and inflation.
The pace of economic growth appeared to slow in the weeks before the meeting. Inflation slackened in March to the slowest pace in two years, while employers added the fewest jobs in any month since last summer. And economists say that the pain of federal spending cuts is just starting to be felt.The pace of economic growth appeared to slow in the weeks before the meeting. Inflation slackened in March to the slowest pace in two years, while employers added the fewest jobs in any month since last summer. And economists say that the pain of federal spending cuts is just starting to be felt.
Inflation was just 1.1 percent in the 12 months that ended in March, according to the most recent data from the Fed’s preferred inflation gauge, the Commerce Department’s index of personal consumption expenditures. That is well below the 2 percent annual pace that the Fed considers healthy.Inflation was just 1.1 percent in the 12 months that ended in March, according to the most recent data from the Fed’s preferred inflation gauge, the Commerce Department’s index of personal consumption expenditures. That is well below the 2 percent annual pace that the Fed considers healthy.
Moreover, the share of Americans with jobs has not increased since the recession.Moreover, the share of Americans with jobs has not increased since the recession.
The central bank is modestly expanding its stimulus campaign each month as it expands its bond portfolio. But the Fed’s most recent economic projections, published in March, showed that most officials expected persistently low inflation and persistently high unemployment for years to come.The central bank is modestly expanding its stimulus campaign each month as it expands its bond portfolio. But the Fed’s most recent economic projections, published in March, showed that most officials expected persistently low inflation and persistently high unemployment for years to come.
Officials, however, are reluctant to do more. They see modest benefits and uncertain costs in buying more bonds. The volume of the Fed’s first-quarter purchases already roughly equaled the volume of new mortgage bond issuance and about 72 percent of the volume of new issuance of long-term federal debt.Officials, however, are reluctant to do more. They see modest benefits and uncertain costs in buying more bonds. The volume of the Fed’s first-quarter purchases already roughly equaled the volume of new mortgage bond issuance and about 72 percent of the volume of new issuance of long-term federal debt.
And the Fed already has tied the duration of low interest rates to the unemployment rate, announcing in December that it intended to hold its benchmark short-term interest rate near zero at least as long as the unemployment rate remained above 6.5 percent, provided that inflation remained under control.And the Fed already has tied the duration of low interest rates to the unemployment rate, announcing in December that it intended to hold its benchmark short-term interest rate near zero at least as long as the unemployment rate remained above 6.5 percent, provided that inflation remained under control.
Before the recent run of lackluster data, a number of Fed officials had said that it might be possible to reduce the volume of asset purchases before the end of the year, earlier than investors generally had anticipated. Still, the Fed changed the language of its statement to emphasize that it was willing to adjust the pace of its asset purchases. “The committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes,” it said.
While Wednesday’s statement provides little insight into the Fed’s deliberations — a glimpse of insight will come with the release of a meeting account in three weeks — more recent public comments suggest that talk of an early wind-down has been quieted by concern that the economy is sputtering again. Analysts described the change as a response to the signs of economic weakness, although they noted the Fed did not change its relatively sunny description of the economic outlook, suggesting that no policy shift was imminent.
That shift was underscored by a change in the language of the statement, which said explicitly for the first time that the Fed could increase the volume of purchases if the economy weakens. The Fed’s chairman, Ben S. Bernanke, and other officials have made that point in public remarks, but statements released after the committee’s previous meetings only alluded to the possibility. Michael Gapen, director of United States economic research at Barclays Capital, described the change as “a fairly obvious nod to some of the recent softness in economic activity, labor markets and inflation.” He said that it reinforced his view that the Fed would maintain its $85 billion-a-month pace through the end of the year.
“Over the last couple of weeks the narrative has changed,” Brian Rehling, chief fixed-income strategist at Wells Fargo, wrote in a note to clients before the release of the Fed’s statement. “It now appears that the current easing purchases may continue longer than many expected and could even increase.” The Fed also could increase the impact of its current campaign simply by telling investors how long it will run – either in terms of a calendar date or an economic target. But officials say it has been impossible to reach a consensus.
The Fed could increase the impact of its current campaign by telling investors how long it will run — in terms of a calendar date or an economic target. But officials say it has been impossible to reach a consensus.