Fri, Oct 31, 2014 page15

• Fed announces end to easing, citing job gains

  ‘SUCCESS STORY’: While the Fed will stop buying bonds, it said short-term interest rates would remain near zero for a ‘considerable time.’ Some analysts are less optimistic

  • NY Times News Service, WASHINGTON
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  An upbeat US Federal Reserve on Wednesday said that the economic recovery was chugging along and that it would end its latest bond-buying campaign on schedule at the end of the month.

  The Fed, in a statement issued after a two-day meeting of its policymaking committee, said the bond-buying program, also known as quantitative easing, had served its purpose by contributing to stronger job growth.

  The Fed also upgraded its appraisal of labor market conditions, saying that “underutilization of labor market resources is gradually diminishing.”

  

  US Federal Reserve Chair Janet Yellen speaks during a press conference following a Federal Open Market Committee meeting in Washington on Wednesday.

  Photo: Bloomberg

  However, it added that it still planned to keep short-term interest rates near zero for a “considerable time.”

  The statement from the Fed’s policymaking committee, led by Fed Chair Janet Yellen, acknowledged the recent weakness in some measures of inflation expectations and the drop in energy prices. However, it said the likelihood of persistently low inflation had actually diminished since earlier this year. The Fed said that survey-based measures of expectations, which are less subject to distortion, had remained relatively stable.

  There was one dissent.

  Federal Reserve Bank of Minneapolis President Narayana Kocherlakota voted to continue the bond-purchase program, citing the sluggish pace of inflation.

  He also called for the Fed to commit to keeping short-term interest rates near zero until officials agreed that annual inflation would rise to 2 percent.

  The Fed’s decision was greeted with calm on Wall Street, with major indexes falling slightly after the announcement.

  The decision caps a six-year period during which the central bank has expanded its holdings of US Treasury and mortgage-backed securities to almost US$4.5 trillion, from less than US$1 trillion in mid-2008.

  The Fed has paused its stimulus campaign several times since the financial crisis, only to conclude that the economy needed more help.

  However, officials say they are confident that the current level of stimulus is sufficient. Through last month, employers added an average of 227,000 jobs a month, and the unemployment rate has fallen faster than expected, to 5.9 percent.

  The Fed next plans to enter a holding pattern, a final phase in which it will maintain the size of the bond portfolio and keep short-term interest rates near zero, until officials decide that the economy no longer needs the help.

  For more than a year, a majority of Fed officials have pointed steadily to the middle of next year as the most likely time for a rate increase.

  Some officials want the Fed to explain more clearly how it will decide when the time has come.

  However, others are concerned that changes in the statement will be interpreted prematurely as evidence that the Fed is pulling back.

  Northern Trust chief economist Carl Tannenbaum said that he hoped the Fed would emulate the clarity of its retreat from bond-buying as it moved toward raising interest rates.

  “I do think this has been a success story,” he said. “I’m hoping that when the time comes to raise interest rates that they’ll do an equally clear job of foreshadowing that.”

  Just a few months ago, a growing number of Fed officials were expressing concern that the central bank might need to start raising rates in the spring.

  However, inflation has remained persistently sluggish.

  Most Fed officials predicted last month that in the next two years, inflation would not reach the 2 percent annual pace the Fed regards as most beneficial for the economy.

  Federal Reserve Bank of San Francisco President John Williams said this month that he saw a greater chance that the first increase would be delayed.

  Asset prices continue to reflect even greater pessimism among many investors. This is partly a distortion caused by the high demand for Treasuries as worried investors move money from Europe to the US.

  However, some analysts say it also reflects a widespread view among investors that the Fed is once again overestimating the economic recovery.

  Deutsche Bank Securities chief international economist Torsten Slok said he did not expect much of a reaction from financial markets, even if the Fed suggested on Wednesday that its economic outlook had improved.

  “It will take more time for the market to shake off the bearish narrative that has been so widespread among fixed income investors over the past six years,” he wrote in a note to clients on Tuesday.

  Cummings said it was more likely that the Fed was wrong.

  “I do think they’re overly optimistic,” she said. “The market and the Fed are definitely saying two different things. And the market is right. It usually is.”
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