News Column

Fed Won't Stop Goosing Economy

March 21, 2013
Federal Reserve

Despite signs of an improving economy, the Federal Reserve said Wednesday that it will continue to pursue an easy-money policy aimed at holding down long-term interest rates and stimulating growth.

In a statement after a two-day meeting, the Fed said it will keep buying $85 billion a month in Treasury bonds and mortgage-backed securities until the labor market improves substantially, echoing its statements since last fall.

The monthly purchases raise bond prices, which pushes down their yields and long-term interest rates broadly, cutting borrowing costs for consumers and businesses.

The Fed on Wednesday also restated its plans to keep its benchmark short-term interest rate near zero at least until the jobless rate falls to 6.5% and the expected annual inflation rate remains below 2.5%.

Thirteen of 19 Fed policymakers at this week's meeting said 2015 remains the likely time frame for when the rate will initially be raised.

At a news conference, Fed Chairman Ben Bernanke acknowledged the recent pickup in the labor market, with non-farm job growth averaging about 205,000 a month the past four months. But, he added, "we do need to see a sustained improvement" before the Fed reduces or ends its asset purchases. "One month or two months doesn't cut it."

The Fed slightly lowered its economic growth forecast, saying it expects the economy to grow 2.3% to 2.8% this year, vs. its December projection of 2.3% to 3%.

The Fed said the economy has returned to a moderate pace of growth after "a pause" late last year. Growth slowed to just a tenth of a percentage point in the fourth quarter, but many economists expect an annual growth rate of 2% to 3% in the first quarter.

Yet by year's end, the Fed predicts a slightly brighter job outlook. It expects the unemployment rate to fall to 7.3% to 7.5%, vs. its December forecast of 7.4% to 7.7%.

Bernanke stressed that the Fed could reduce bond purchases if the labor market gains steam and ramp them up again if it weakens. He noted looming federal budget cuts and a recent rise in payroll taxes are expected to slow the economy midyear and helped prompt the Fed to make its stimulus "as aggressive as it is."

Jim O'Sullivan, chief U.S. economist of High Frequency Economics, says Bernanke's comments suggest the bond-buying could be scaled down by the third quarter if the federal budget cuts don't sharply slow job gains.

Worries among investors emerged last month that the Fed might signal an early scale-back of the bond purchases after the Fed's January meeting minutes showed that "many" policymakers were growing concerned about the program's risks, such as financial instability.


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Source: Copyright USA TODAY 2013


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