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Federal Reserve keeps economic stimulus going

10:22 AM, Mar 20, 2013   |    comments
Ben Bernanke
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Despite signs of an improving economy, the Federal Reserve Wednesday said it will continue to pursue an easy-money policy aimed at holding down long-term interest rates and stimulating growth.

In a statement after a two-day meeting, the Fed said it will keep buying $85 billion a month in Treasury bonds and mortgage-backed securities until the labor market improves substantially, echoing its statements since last fall.

The monthly bond purchases raise bond prices, which pushes down their yields as well as long-term interest rates broadly.

The Fed slightly lowered its economic growth forecast, saying it expects the economy to grow 2.3% to 2.8% this year, vs. its December projection of 2.3 percent to 3 percent.

However, the Fed predicts a slightly brighter job outlook. It expects the unemployment rate to fall to 7.3 percent to 7.5 percent by the end of the year, vs. its December forecast of 7.4 percent to 7.7 percent.

That was largely anticipated, though, since the jobless rate in February already had dropped to 7.7 percent from 7.9 percent. One reason for the decline is the continuing retirement of Baby Boomers, leaving fewer people working or looking for work. Unemployment is projected to fall to 6 percent to 6.5 percent in 2015.

Inflation is expected to remain tame, at 1.3 percent to 1.7 percent this year and 2 percent or lower through 2015.

In its statement, the Fed noted that the labor market has "shown signs of improvement in recent months but the unemployment rate remains elevated." And while the housing market "has strengthened further ... fiscal policy (in Washington) has become somewhat more restrictive."

Worries among investors that the Fed might signal an early scale-back of the bond purchases emerged last month after minutes of the Fed's January meeting showed that "many" policymakers are growing concerned about the program's risks, such as inflation. Some Fed officials said it should end or at least reduce the bond buying by mid-year, before the job market picks up significantly.

At a Senate hearing last month, Fed Chairman Ben Bernanke largely allayed financial market jitters, saying the program's benefits - boosting the recovery and job market - outweigh any risks.

The meeting minutes showed that the Fed planned to review the bond purchases at its March meeting. Some economists had expected the Fed at least to signal a possible tapering of the purchases later this year, in part because of recent economic reports that have exceeded forecasts despite Washington deficit-cutting that's poised to slow growth.

Employers added 236,000 jobs in February and job growth has averaged 205,000 past four months, up from 154,000 in the July-October period. February's employment rate fell to 7.7 percent from 7.9 percent. Retail sales and business investment also have beaten estimates, and the housing market has continued an encouraging rebound.

Still, a payroll tax increase in January and across-the-board federal budget cuts that began March 1 are expected to pare 2013 economic growth by 1.5 percentage points, mostly by slowing the expansion in mid-year.

Economist Mark Zandi of Moody's Analytics says that leaves the economy too vulnerable for the Fed to even signal a possible early end to its stimulus, which itself could raise interest rates and hinder growth. Meanwhile, concerns about Europe's fragile economy have deepened recently.

The Fed on Wednesday also reiterated that it plans to keep its benchmark short-term interest rate near zero at least until the jobless rate falls to 6.5%, as long as annual inflation remains below 2.5 percent.

By Paul Davidson

USA Today

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