Fed stands by stimulus, sees stronger economy
WASHINGTON — The Federal Reserve said on Wednesday that the economy has strengthened but needs the Fed's extraordinary support to help lower high unemployment.
In a statement at the end of a two-day meeting, the Fed stood by its plan to keep short-term interest rates at record lows at least until unemployment falls to 6.5 percent, as long as the inflation outlook remains mild. And it said it would continue buying $85 billion a month in bonds indefinitely to keep long-term borrowing costs down.
Speaking at a news conference, Chairman Ben Bernanke stressed that while the economy has improved, the Fed won't ease its aggressive stimulus policies until it's convinced the economic gains can be sustained. An unemployment rate of 6.5 percent is a threshold, not a “trigger,” for a possible rate increase, he said.
Bernanke also said the Fed might vary the size of its monthly bond purchases depending on whether or how much the job market improves. The unemployment rate has fallen to a four-year low of 7.7 percent, among many signs of a healthier economy.
“We are seeing improvement,” Bernanke said. “One thing we would need is to see this is not temporary improvement.”
Jim O'Sullivan, chief U.S. economist at High Frequency Economics, said the Fed appears focused on “whether recent improvement continues, and no changes to the (bond) purchase program appear imminent.”
O'Sullivan said the Fed might scale back its bond purchases in the second half of this year if job growth continues to accelerate.
Brian Bethune, an economics professor at Gordon College in Wenham, Mass., said the Fed's first move might be to reduce its monthly bond purchases in the October-December quarter of this year and again in the first quarter of 2014. Reducing the Fed's bond purchases would likely cause interest rates to rise, making loans more expensive, and possibly cause stock prices to fall.
Investors seemed pleased with the Fed's decision to maintain its low-interest rate policies indefinitely for now. The Dow Jones industrial average close up about 56 points, having risen slightly after the Fed's statement was released at 2 p.m.
The Fed's statement took note of the global stresses that have been intensified by the turmoil in Cyprus, which is trying to stave off financial ruin. No longer does the Fed statement say, as it did in December, that “strains in global financial markets have eased somewhat.”
Bernanke was asked at his news conference whether the flare-up in Cyprus signals that the U.S. financial system might be more vulnerable than bank “stress tests” have shown. He sought to downplay the dangers posed by the tiny Mediterranean nation. He said that “at this point,” he sees no major risks to the American financial system or economy.
The Fed noted in its statement that the job market has improved, consumer spending and business investment have increased, and the housing market has strengthened. Its latest economic forecasts, also released on Wednesday, show the Fed still does not expect unemployment to reach 6.5 percent until 2015.
The Fed also cautioned that government spending cuts and tax increases could slow the economy. It predicts that growth won't exceed 2.8 percent this year, slightly lower than its December forecast of 3 percent.
A total of 13 Fed officials still think the first rate increase won't occur until 2015, the same number who thought so in December. One Fed official thinks the first boost in the short-term lending rate won't occur until 2016.
The statement was approved on an 11-1 vote. Esther George, president of the Kansas City regional Fed bank, dissented for a second straight meeting. She reiterated her concerns that the Fed's aggressive stimulus could heighten the risk of inflation and financial instability — a concern shared by other critics.
Some economists say they fear the Fed has pumped so much money into the financial system that it could eventually ignite inflation, fuel speculative asset bubbles or destabilize markets once the Fed has to start raising rates or unloading its record $3 trillion investment portfolio.
And while the Fed's low interest-rate policies are intended to boost borrowing, spending and stock prices, they also hurt millions of retirees and others who depend on income from savings.
“Things are not going to get better for savers,” said Greg McBride, senior financial analyst at Bankrate.com. “Rates are going to stay low for borrowers, and the Fed's accommodation will continue to be a positive for the stock market. Right now, the market is addicted to Fed stimulus.”
The economy slowed to an annual growth rate of just 0.1 percent in the October-December quarter, a near-stall that was due mainly to temporary factors that have largely faded. Economists think growth has rebounded in the January-March quarter to an annual rate around 2 percent or more. The most recent data support that view.
Americans spent more at retailers in February despite higher Social Security taxes that shrank most workers' paychecks. Manufacturing gained solidly in February. And employers have gone on a four-month hiring spree, adding an average of 205,000 jobs a month.
In February, the unemployment rate, though still high, reached its lowest point since December 2008.
One reason for the Fed's reluctance to reduce its stimulus is the history of the past three years. In each of the three, economic prospects looked promising as the year began. Yet in each case, the economy stumbled.
Though the economy has brightened this year, it still faces threats, including across-the-board government spending cuts that took effect March 1 and are expected to trigger furloughs and layoffs.
The Fed's forecasts for the economy are rosier than those issued by the Congressional Budget Office. The CBO has warned that the government spending cuts, along with the Social Security tax increase and higher taxes on top earners, could slow growth by 1.5 percentage points this year, to 1.5 percent.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Operating loss widens at Highmark parent
- Stocks fall for 2nd straight day as corporate earnings concerns deepen
- Anchor Hocking parent EveryWare files for Chapter 11
- Pennsylvania grid operator might delay power auction for new rules
- Summer blend to boost gasoline prices over next month
- Stocks of Pittsburgh-area companies set record in March
- Stop foreign dumping, U.S. Steel CEO Longhi tells Congress
- Falling demand for steel not likely to reverse any time soon
- Consol Energy files for IPO of coal spin-off