The Federal Reserve on Wednesday left its $85 billion a month stimulus program in place, against broad expectations that it would reduce it as the economy grows.
Fed policy makers instead cut their growth forecast for this year and next, suggesting the economy is feeling the impact of government spending cuts and continues to struggle to break free from the Great Recession.
The Federal Open Market Committee said that although the economy appears to be holding up amid government “sequester” spending cuts, it “decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”
In addition, it pointed to the impact of a sharp rise in interest rates since May as possibly already slowing the economy.
“The committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall,” it said in a statement at the end of a two-day monetary policy meeting.
“But the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.”
The Fed had been widely expected to begin reducing the bond-purchase program, aimed at pulling down long-term interest rates, after Fed Chairman Ben Bernanke predicted in May that the stimulus operation could be tapered late this year.
For most analysts, the debate was only over how much the quantitative easing (QE) bond purchases would be cut — with the guesses from $5 billion a month to $25 billion a month.
But the FOMC decision was not a departure from what Bernanke has stated publicly. He has consistently said the taper of the QE program could begin sometime late this year, if the economy continued to gain broadly.
The FOMC acknowledged that the economy is still expanding “at a moderate pace,” and that labor market conditions — a central focus of current Fed policy — have improved in recent months.
However, it noted, the jobless rate at 7.3 percent in August “remains elevated.”
The FOMC reduced its growth forecasts for the US economy, cutting the 2013 outlook by 0.3 percentage points to a range of 2.0-2.3 percent, and lowering the prediction for next year to 2.9-3.1 percent.
It slightly improved its prediction for the fall in the jobless rate, to 6.4-6.8 percent by the end of 2014.
Yet, even though that put labor market conditions at the FOMC’s threshold for tightening monetary policy, the large majority of FOMC members continued to see the Fed’s benchmark interest rate being increased only in 2015.
The federal funds rate has been locked at an ultra-low 0.0-0.25 percent level since the end of 2008.