Amid signs of a weakening economy, the Federal Reserve agreed Wednesday to continue an aggressive initiative to hold down interest rates and stimulate growth by buying government bonds.
Economic reports Wednesday showed manufacturing slowing and construction
spending falling, adding to other worrisome data recently.
In a statement after a two-day policymaking meeting, the Fed said it will keep
buying $85 billion a month in Treasury bonds and mortgage-backed securities
until the job market improves substantially. The purchases increase the assets'
prices and push down their yields, lowering interest rates broadly.
The Fed said for the first time that it could increase or reduce the pace of its
government bond purchases depending on the outlook for the job market and
inflation. The statement reflects Fed Chairman Ben Bernanke's comments in March
as well as the economy's recent volatility.
Until recently, strong economic activity and job growth early this year had
persuaded Fed policymakers to signal that they could begin to scale back the
bond purchases by midyear to head off inflation and market instability.
But a report this week showed inflation in the 12 months ended in March was just
1%, well below the Fed's 2% target. Such a meager rise in wages and prices
typically reflects a weak economy, and it can prompt consumers to put off
purchases on the belief that prices will stay low.
As a result, some Fed officials recently have discussed the possibility of
increasing the pace of the bond purchases in the unlikely event that very low
inflation persists.
The Fed said in its May 1 statement that the economy has continued to expand
moderately, but it noted that deficit-cutting "is restraining economic growth."
Recent across-the-board federal spending reductions and Congress' failure to
renew a payroll tax cut have begun to dampen consumer spending and the economy
broadly.
Among the troubling signals Wednesday:
--The pace of growth in manufacturing in April declined to the lowest level this
year, leaving the industry expanding but just just barely, the Institute for
Supply Management said. A recession in Europe and a slowdown in China's growth
are crimping exports, says economist Cliff Waldman of the Manufacturers Alliance
for Productivity and Innovation.
--Construction spending in March fell 1.7% as a 4.1% drop in government projects
more than offset modest gains in home building, the Commerce Department said.
--Benchmark crude oil fell 2.6% to $91.03 a barrel on concerns about an economic
falloff in the U.S. and China.
Other recent data have shown slackening retail sales and orders for big-ticket
items such as airplanes and appliances. Last week, the government said the
economy grew at a slower-than-expected 2.5% annual rate in the first quarter.
