US Fed holds firm to stimulus plan

Reuters, Washington

Fri, Mar 22, 2013 - Page 15

The US Federal Reserve on Wednesday pressed forward with its aggressive policy stimulus despite improvements in the US economy, pointing to still-high unemployment, fiscal headwinds out of Washington and risks from abroad.

Meeting as turmoil in Europe took another turn for the worse, the US central bank appeared unfazed by concerns that its US$85 billion in monthly bond purchases could disrupt financial markets or inflate asset bubbles.

The Fed’s policy-setting committee nodded to brighter economic signs in the US. However, Chairman Ben Bernanke said he had not yet seen meaningful changes to the troubled labor market and noted that tighter fiscal policy is one reason the central bank has been so aggressive.

Most Fed policymakers believe the purchases of US Treasury and mortgage bonds are lowering longer-term borrowing costs and providing “meaningful support to economic growth and job creation,” Bernanke told a news conference after the central bank announced its decision.

“However, most also agree that this monetary tool will likely not be able on its own to fully offset major economic headwinds such as those that might arise from significant near-term fiscal restraint, or from a sharp increase in global financial stresses,” he said.

The Fed cut overnight interest rates to near zero in 2008 and has bought more than US$2.5 trillion in bonds to spur consumption, investment and hiring.

The Fed reiterated that it planned to keep interest rates near zero until the jobless rate falls to 6.5 percent as long as inflation did not threaten to pierce 2.5 percent over a one to two-year horizon.

Bernanke said the central bank might slow the pace of its bond buying as the economy strengthened, but that it would only do so after the labor market showed sustained improvement over a number of months.

Some Fed officials have expressed concern that the purchases could fuel asset price bubbles, spark future inflation or lead to balance sheet losses later this decade. However, Bernanke gave no indication those risks might soon become a binding constraint.

“These costs remain manageable but will continue to be monitored, and we will take them into appropriate account as we determine the size, pace and composition of our asset purchases,” he said.

The vote to continue with the purchases was 11 to 1, with Kansas City Federal Reserve Bank President Esther George dissenting for a second straight time.

Fed officials now see growth in a range of 2.3 to 2.8 percent this year, down from 2.3 to 3 percent in December last year.

However, they now expect the jobless rate, which registered 7.7 percent last month, to average between 7.3 and 7.5 percent in the fourth quarter of this year. Previously, that range had been 7.4 to 7.7 percent.

However, the unemployment rate will not fall to 6.5 percent until 2015, estimates indicate.