This article is from the source 'nytimes' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.nytimes.com/2013/06/20/business/economy/fed-more-optimistic-about-economy-maintains-bond-buying.html

The article has changed 2 times. There is an RSS feed of changes available.

Version 0 Version 1
Fed Outlines Timeline for Winding Down Stimulus Optimistic Fed Outlines an End to Its Stimulus
(about 5 hours later)
WASHINGTON — The Federal Reserve chairman, Ben S. Bernanke, said on Wednesday that the central bank intended to reduce its monetary stimulus later this year — and end the bond purchases entirely by the middle of next year — if unemployment continued to decline at the pace that the Fed expected. WASHINGTON — The Federal Reserve, increasingly confident in the durability of economic growth, expects to start pulling back later this year from its efforts to stimulate the economy, the Fed chairman, Ben S. Bernanke, said on Wednesday.
Mr. Bernanke said that the Fed planned to continue the asset purchases until the unemployment rate fell to about 7 percent, the first time that the Fed has specified an economic objective for the bond-buying. The rate stood at 7.6 percent in May. Mr. Bernanke, offering new details, said the central bank intends to scale down gradually its monthly purchases of Treasury securities and mortgage-backed bonds beginning later this year and ending when the unemployment rate hits 7 percent, which the Fed expects to happen by the middle of next year.
The Federal Reserve also struck notes of greater optimism about the economic recovery, saying in a statement released after a two-day meeting of its policy-making committee that the economy was expanding “at a moderate pace,” the job market was improving and risks to the recovery had “diminished since last fall.” The central bank would then take several more years to unwind the rest of its extraordinary stimulus campaign, slowly raising short-term interest rates from essentially zero to more normal levels after the jobless rate has fallen to 6.5 percent or lower.
In a separate forecast released at the same time, Fed officials predicted that the unemployment rate would decline more quickly than they had previously expected, falling to 6.5 percent to 6.8 percent by the end of 2014. They had predicted in March that the rate would be 6.7 percent to 7 percent. He emphasized, however, that the timing of the retreat depends on the health of the economy; if growth falters, the central bank would slow, or even reverse, the process. The expectations of Fed officials for the next several years, published Wednesday, are more optimistic than the consensus of private forecasters.
Stocks fell on Wall Street after Mr. Bernanke’s remarks, with the Dow Jones industrial average ending down 1.4 percent, or more than 200 points. The broader Standard & Poor’s 500-stock index also lost 1.4 percent. Investors sold on his indications that the Fed would reduce its stimulus efforts starting later this year. Pulling back “would basically say that we’ve had a relatively decent economic outcome in terms of sustained improvement in growth and unemployment,” Mr. Bernanke said. “If things are worse, we will do more. If things are better, we will do less.”
The Fed said that it would continue for now to purchase $85 billion a month in Treasury securities and mortgage-backed securities, in addition to holding short-term interest rates near zero. Both policies are intended to ease financial conditions, to encourage economic activity and to increase the pace of job creation. Mr. Bernanke’s comments, which followed a two-day meeting of the Fed’s policy-making committee, appeared to disappoint investors on Wall Street who had hoped that the central bank would do more for longer. Stocks fell, with the broad Standard & Poor’s 500-stock index dropping 1.39 percent; interest rates rose.
Two of the 12 members of the Federal Open Market Committee dissented from the decision. Esther George, president of the Federal Reserve Bank of Kansas City, reiterated her concern that the Fed was doing too much. James Bullard, president of the Federal Reserve Bank of St. Louis, broke with the majority for the first time this year, expressing concern about the sagging pace of inflation. The impact on the economy will take longer to judge. The Fed’s goal is to pull back as the economy gains strength so its departure is barely felt, like a parent who lets go of a bike at the moment a child is ready to ride. But the Fed has removed its hands too soon several times in recent years. On the other side of the equation, the central bank, at some point, runs the risk of pushing too hard for too long, which can also cause crashes.
The improved outlook helps to explain why Fed officials have increasingly suggested that they may seek to reduce the pace of asset purchases in the coming months. The Fed has said that it will stop buying bonds well before it begins to raise interest rates. Gennadiy Goldberg, an analyst at TD Securities, described the market’s reaction as “emblematic of the lumpy path toward normalization,” illustrating the limits of the Fed’s ability to control the way that the economy will respond to its retreat.
While the vast majority of the 19 Fed officials who participate in policy continue to expect a first rate increase in 2015, 13 said they expected the Fed to raise its benchmark short-term rate at least to 1 percent by the end of 2015, implying that increases would begin relatively early in the year. In March, only 10 officials forecast that rates would hit 1 percent by the end of 2015. The housing market is an example. The Fed, deciding last year that it needed to do more, began to buy mortgage bonds in an effort to drive down borrowing costs. The lower rates spurred a wave of refinancing and home buying. But now, as the recovery gains momentum and the Fed signals that it plans to pull back, interest rates are beginning to rise and mortgage refinancing is beginning to wane.
The Fed’s forecasts have consistently overestimated the strength of the economic recovery since the end of the recession. The central bank has suspended its stimulus efforts twice in recent years, only to find that it needed to do more. Officials have said that they are eager to avoid repeating those mistakes. But there is growing optimism inside the central bank that the Fed is finally doing enough. Mr. Bernanke said on Wednesday that the rate increases were a “good thing,” a sign that the economy is returning to health.
The Fed is trying to encourage job creation through a loose monetary policy, holding short-term interest rates near zero and purchasing $85 billion a month in mortgage-backed securities and Treasury securities. But Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the Fed still runs the risk of withdrawing its extra support for the economy too soon.
Economic conditions have improved modestly since the Fed began this latest round of asset purchases last September. The economy has added about 197,000 jobs a month, on average, and the unemployment rate has fallen slightly to 7.6 percent in May from 7.8 percent in September. The impact of federal spending cuts so far has been smaller than many forecasters, including the Fed, had expected. “Later in the cycle, we will be happy to take that view too,” Mr. Shepherdson wrote Wednesday. “But not now, and it is very odd coming from a Fed chairman who has placed so much emphasis on the role of housing in the recovery. We do not think the market is yet ready to absorb higher rates.”
But the economic damage of the recession remains largely unrepaired. Job growth is basically just keeping pace with population growth. The share of American adults with jobs has not increased in three years. At the same time, the Fed’s preferred measure of inflation has sagged to an annual pace 1.05 percent, the lowest level in more than 50 years, as the economy continues to operate below capacity. The Fed, in a statement released after the meeting of the Federal Open Market Committee, sounded notes of increased optimism about the economy, but unusually, the statement did not describe the bond-buying timeline. Mr. Bernanke said he had been “deputized” to share the details at the news conference.
Despite high unemployment and low inflation, the Fed has shown no interest in expanding the pace of its stimulus campaign. Officials say that they are doing as much as they can. The debate instead has focused on how soon the Fed can afford to start buying fewer bonds. The statement said that the economy was expanding “at a moderate pace” and that the job market was improving. Most significantly, it noted that risks to growth had “diminished since last fall,” an important assertion because the Fed has been trying in part to shield the economy from the consequences of reductions in federal spending. Those consequences have been milder than expected.
Such a deceleration is not likely before September, at the earliest, but officials have sought to prepare investors for the change. In particular, the Fed wants to underscore that a smaller monthly volume of bond purchases still means that the Fed’s portfolio would be growing larger with each passing month. Indeed, the Fed argues that such a change would not amount to a tightening of monetary policy because the size of the portfolio is the source of the stimulus. In a separate forecast released at the same time, Fed officials predicted that the unemployment rate would decline more quickly than they had projected, dropping to between 6.5 percent and 6.8 percent by the end of 2014. In March, they predicted that the rate would fall by the end of next year to between 6.7 percent and 7 percent.
The Fed’s chairman, Ben S. Bernanke, also has been at pains to remind investors that a change in the pace of bond purchases does not indicate a change in the duration of the Fed’s plans to keep short-term rates near zero, which it has said it intends to do at least until the unemployment rate falls below 6.5 percent. The Fed said that it would continue for now to buy $85 billion a month in Treasury securities and mortgage-backed bonds, in addition to holding short-term interest rates near zero. Both policies are intended to ease financial conditions, to encourage economic activity and to increase the pace of job creation.
Investors, however, have responded skeptically. After all, the Fed needs to slow down first before it begins to retreat. Interest rates on 10-year Treasuries, a benchmark for the Fed’s efforts to reduce borrowing costs, rose to 2.20 percent on Tuesday from a low of 1.66 percent at the start of May. Two of the 12 members of the Federal Open Market Committee dissented. Esther George, president of the Federal Reserve Bank of Kansas City, reiterated her concern that the Fed was doing too much. James Bullard, president of the Federal Reserve Bank of St. Louis, broke with the majority for the first time this year to express concern about the sagging pace of inflation.
“Fed officials have been trying to convince everyone that QE is a flexible instrument and that the onset of tapering does not convey information about the date of the first fed funds rate hike,” Vincent Reinhart, chief United States economist at Morgan Stanley, wrote Wednesday. “We believe such a conclusion is false.” Economic conditions have improved modestly since the Fed began its latest round of asset purchases last September. The economy has added about 197,000 jobs a month, and the unemployment rate has fallen slightly to 7.6 percent in May from 7.8 percent in September.
Moreover, some economists regard the volume of monthly purchases as more important than the total amount of the Fed’s holdings, meaning that a reduction in monthly purchases would indeed tend to tighten financial conditions. But the economic damage of the recession remains largely unrepaired. Job growth is basically keeping pace with population growth. The share of American adults with jobs has not increased in three years. Moreover, the Fed’s preferred measure of inflation has shrunk to an annual pace 1.05 percent, the lowest level in more than 50 years, as the economy continues to operate below capacity.
The Fed also finds itself warring against psychology. The Fed would prefer annual inflation to run closer to 2 percent, diminishing the risk of outright deflation, or a general fall in the level of prices, which can paralyze economic activity as buyers wait for lower prices.
The Fed has established $85 billion as a baseline in the minds of investors. That might not matter if the benefits of the program were purely mechanical. But buying bonds is also a way for the Fed to signal its determination to keep interest rates low for years to come. Despite the fact that unemployment remains high and inflation remains low, the Fed has shown no sign of interest in expanding the pace of its stimulus campaign. Officials say that they are doing as much as they can. The debate instead has focused on how soon the Fed can afford to start buying fewer bonds.
The program, in other words, is an effort to instill confidence in investors. And any reduction in the pace of purchases tends to undermine that message. Mr. Bernanke said on Wednesday that even as the Fed pulls back, it still would be increasing its total bond holdings each month, and therefore that the stimulating effect also would continue to increase. He also emphasized the Fed’s intent to hold short-term rates near zero well beyond the end of the asset purchases, a policy that the Fed regards as significantly more potent.
“Our intent from the beginning was to use asset purchases as a way to achieve some near-term momentum and then to allow the low interest rate policy to carry us through,” he said.
The Fed has said that rates would remain near zero at least as long as the unemployment rate remained above 6.5 percent. Mr. Bernanke said the Fed might well hold rates low for longer, particularly if inflation remained weak. He added that the Fed would consider adopting a lower threshold. The goal, he said, was to stabilize unemployment between 5 percent and 6 percent.
Mr. Bernanke is unlikely to preside over those decisions. His second term as chairman ends next January, and President Obama reinforced expectations Monday that Mr. Bernanke would not be nominated by the White House to serve a third term. Mr. Bernanke declined to answer several questions about the president’s remarks and his own plans at his news conference on Wednesday, insisting that Fed policy should be the sole focus.