The Federal Reserve, saying economic growth had “paused” in recent months, announced Wednesday it will continue its $85 billion monthly bond buying and hold interest rates near zero until unemployment falls to at least 6.5 percent.
The central bank decision, which followed a two-day meeting, had been widely expected, especially after a surprising decline in U.S. economic growth for the fourth quarter.
Earlier Wednesday, the government announced that GDP unexpectedly suffered its first decline since the 2007-09 recession, falling at a 0.1 percent annual rate after growing at a 3.1 percent clip in the third quarter.
Markets showed relatively little reaction to the GDP report, in part because it reinforced expectations that the Fed will continue to provide stimulus as long as the economy is weak. Stocks were slightly lower after the Fed decision.
“The report, noisy as it is, may help ease ideas that have surfaced earlier this month that the Fed may look to soon pull back from its asset purchases,” wrote Marc Chandler, chief currency strategist at Brown Brothers Harriman.
The minutes of the last Fed meeting in December showed that some Fed members thought QE should end this year, a comment that helped send interest rates higher this month.
In its statement, the Fed said the slowdown in growth was largely because of weather-related disruptions and other temporary factors. It noted that employment continues to expand at a moderate pace, consumer spending and business investment increased and the housing sector showed further improvement.
The central bank also said strains in global financial markets have eased somewhat, but cautioned that risks remain.
The statement was approved on an 11-1 vote. Esther George, the president of the Federal Reserve Bank of Kansas City, objected. George expressed concerns about the risk of higher inflation caused by the Fed’s aggressive policies.
Last month, the Fed signaled for the first time that it will tie its policies to specific economic barometers. It said that as long as the inflation outlook is mild, it could keep short-term rates near zero until unemployment dips below 6.5 percent from the current 7.8 percent.
The Fed also said it would continue its bond purchases until the job market improved “substantially.”
When it buys bonds, the Fed increases its investment portfolio and pumps more money into the financial system—something critics say could eventually ignite inflation or create dangerous bubbles in assets like real estate or stocks.
On Friday, the government will release its jobs report for January. The unemployment is expected to remain 7.8 percent.
That still-high rate, 3 1/2 years after the Great Recession officially ended, helps explain why the Fed has kept its key short-term rate at a record low near zero since December 2008, just after the financial crisis erupted.
Still, some private economists think the Fed will decide to suspend its bond purchases in the second half of this year. They note that the minutes of the Fed’s December meeting revealed a split: Some of the 12 voting members thought the bond purchases would be needed through 2013.
Others felt the purchases should be slowed or stopped altogether before year’s end.
Source: CNBC
