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September 18, 2013

Fed delays pullback in bond buys, awaits more data

WASHINGTON (AP) — The Federal Reserve has decided against reducing its stimulus for the U.S. economy. It says it will continue to buy $85 billion a month in bonds because it thinks the economy still needs the support.

The Fed said in a statement today that it will maintain the pace of its bond purchases while it awaits conclusive evidence that the economy will strengthen. It issued its statement while also downgrading its outlook for economic growth this year and next.

The bond purchases are intended to keep long-term borrowing rates low to boost spending and economic growth.

“We’re in a slow-growth economy with high unemployment and low inflation,” said Greg McBride, senior financial analyst at Bankrate.com. “There’s no specific catalyst for the Fed to remove stimulus.”

Stocks spiked after the Fed released the statement at the end of its two-day policy meeting. The Dow Jones industrial average, which had been down before the statement was issued at 2 p.m. Eastern time, was up more than 100 points a half hour later.

In the statement, the Fed said that the economy is growing moderately and that some indicators of the job market have shown improvement. But it noted that rising mortgage rates and government spending cuts are restraining growth.

The Fed also repeated that it plans to keep its key short-term interest rate near zero at least until unemployment falls to 6.5 percent, down from 7.3 percent last month. In the Fed’s most recent forecast, unemployment could reach that level as soon as late 2014.

Many thought the Fed would scale back its purchases. But interest rates have jumped since May, when Chairman Ben Bernanke first said the Fed might slow its bond buys later this year. But Bernanke cautioned that the reduction would hinge on the economy showing continued improvement.

In its statement, the Fed says that the rise in interest rates “could slow the pace of improvement in the economy and labor market” if they are sustained.

The Fed also lowered its economic growth forecasts for this year and next year slightly, likely reflecting its concerns about interest rates.

The statement was approved on a 9-1 vote. Esther George, president of the Federal Reserve Bank of Kansas City, dissented for the sixth time this year. She repeated her concerns that the bond purchases could fuel the risk of inflation and financial instability.

The decision to maintain its stimulus follows reports of sluggish economic growth. Employers slowed hiring this summer, and consumers spent more cautiously.

Super-low rates are credited with helping fuel a housing comeback, support economic growth, drive stocks to record highs and restore the wealth of many Americans. But the average rate on the 30-year mortgage has jumped more than a full percentage point since May and was 4.57 percent last week — just below the two-year high.

The unemployment rate is now 7.3 percent, the lowest since 2008. Yet the rate has dropped in large part because many people have stopped looking for work and are no longer counted as unemployed — not because hiring has accelerated. Inflation is running below the Fed’s 2 percent target.

The Fed meeting took place at a time of uncertainty about who will succeed Bernanke when his term ends in January. On Sunday, Lawrence Summers, who was considered the leading candidate, withdrew from consideration.

Summers’ withdrawal followed growing resistance from critics. His exit has opened the door for his chief rival, Janet Yellen, the Fed’s vice chair. If chosen by President Barack Obama and confirmed by the Senate, Yellen would become the first woman to lead the Fed.

 

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