Federal Reserve suggests more easing if economy falters
The Federal Reserve kept its easy-money policies Wednesday but left the door open to step up bond purchases if the economy slowed under the government’s severe “sequester” spending cuts.
The central bank’s policy board, the Federal Open Market Committee, said after a two-day meeting that the economy continued to grow at a “moderate” pace.
But it also said that growth was being restrained by the government’s tighter fiscal policy, which imposed tax hikes in January and across-the-board spending cuts in March.
The Fed suggested, in a change from previous statements, that it would keep open the option of more stimulus — larger bond purchases — if the economy slows.
As widely expected, the FOMC held its key interest rate at zero to 0.25 percent.
And the Fed policy makers also stuck to their $85 billion a month bond-buying program, known as quantitative easing (QE), to keep downward pressure on longer-term interest rates, support mortgage markets and ease credit.
The FOMC reiterated that it would maintain its ultra-loose policy until the outlook for the job market improved “substantially” in a context of price stability.
With the unemployment rate at 7.6 percent amid lackluster 2.5 percent growth, it was unlikely the jobless rate would fall below the central bank’s 6.5 percent threshold for considering tapering off its stimulus any time soon.
Paul Edelstein of IHS Global Insight said the FOMC statement reinforced the idea that QE will last beyond 2013 “since unemployment isn’t expected to improve much this year and inflation is so low.”
The FOMC, led by Fed Chairman Ben Bernanke, said it continued to see downside risks to the economic outlook. It said it would step up or rein in the bond purchases if conditions warranted.
“The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes,” it said.
Earlier this year, as some policy makers warned of inflation concerns, the Fed and analysts were more focused on the option of winding down QE.
But this week’s meeting came after a series of economic data showing weakening momentum and falling inflation.
The Fed’s preferred inflation indicator rose just 1.1 percent in March from a year ago.
The Fed policy makers reiterated that inflation was not a significant concern, saying it was running “somewhat below” the FOMC’s 2.0 percent objective and they expected it to stay at or below that level over the medium term.
“When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2.0 percent.”
Ryan Sweet of Moody’s Analytics said the discussion of adjusting the Fed’s asset purchases appeared to have been better balanced than at its March meeting “as a lack of inflation has some Fed officials beginning to stir.”
But he said the Fed was in “wait-and-see mode.”
“Unless the spring swoon turns into something worse, causing unemployment to resume rising and/or inflation to ease further, we don’t expect any changes to monetary policy,” Sweet said.
Barclays economist Michael Gregory said the FOMC was not ready to publicly acknowledge an economic “soft patch” at this stage, especially the kind of slump in 2011 and 2012 that led the Fed to ease further.
“However, the message seems to be if a 2011/2012-type soft patch does indeed emerge, the Fed will likely increase QE (and do other things as well),” Gregory said in a research note.
Kansas City Fed president Esther George was the sole FOMC dissenter for the third meeting in a row, citing concerns that the high level of stimulus raised the risks of inflation and financial imbalances.