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| In Surprise, Fed Decides Not to Curtail Stimulus Effort | In Surprise, Fed Decides Not to Curtail Stimulus Effort |
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| WASHINGTON — The Federal Reserve postponed any retreat from its long-running stimulus campaign Wednesday, saying that it would continue to buy $85 billion a month in bonds to encourage job creation and economic growth. | WASHINGTON — The Federal Reserve postponed any retreat from its long-running stimulus campaign Wednesday, saying that it would continue to buy $85 billion a month in bonds to encourage job creation and economic growth. |
| As Congressional Republicans and the White House hurtle toward another showdown over federal spending, the Fed said it was concerned that fiscal policy once again “is restraining economic growth,” threatening to undermine what the Fed had described just months ago as a recovery gaining strength. | As Congressional Republicans and the White House hurtle toward another showdown over federal spending, the Fed said it was concerned that fiscal policy once again “is restraining economic growth,” threatening to undermine what the Fed had described just months ago as a recovery gaining strength. |
| Stock markets jumped after the 2 p.m. announcement, with the Standard & Poor’s 500-stock index touching a record high and the Dow Jones industrial average ahead more than 150 points. | |
| The Fed’s decision also may reflect the consequences of yet another premature retreat from its own policies. Mortgage rates have climbed and other financial conditions have tightened since the Fed signaled in June that it intended to reduce its asset purchases by the end of the year, the Fed noted Wednesday. | The Fed’s decision also may reflect the consequences of yet another premature retreat from its own policies. Mortgage rates have climbed and other financial conditions have tightened since the Fed signaled in June that it intended to reduce its asset purchases by the end of the year, the Fed noted Wednesday. |
| “The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and the labor market,” it said in a statement released after a regular two-day meeting of its policy-making committee. | “The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and the labor market,” it said in a statement released after a regular two-day meeting of its policy-making committee. |
| The decision, an apparent victory for the Fed’s chairman, Ben S. Bernanke, and his allies who have argued for the benefits of asset purchases, was supported by all but one member of the Federal Open Market Committee. Esther George, president of the Federal Reserve Bank of Kansas City, dissented as she has at each previous meeting this year, citing concerns about inflation and financial stability. | The decision, an apparent victory for the Fed’s chairman, Ben S. Bernanke, and his allies who have argued for the benefits of asset purchases, was supported by all but one member of the Federal Open Market Committee. Esther George, president of the Federal Reserve Bank of Kansas City, dissented as she has at each previous meeting this year, citing concerns about inflation and financial stability. |
| The Fed may still begin to reduce asset purchases by the end of the year, consistent with its previous statements. The Fed also refrained from any change in its stated intention to hold short-term interest rates near zero at least as long as the unemployment rate remains above 6.5 percent. | The Fed may still begin to reduce asset purchases by the end of the year, consistent with its previous statements. The Fed also refrained from any change in its stated intention to hold short-term interest rates near zero at least as long as the unemployment rate remains above 6.5 percent. |
| The statement said the committee sees recent economic data “as consistent with growing underlying strength in the broader economy.” However, the statement continued, “The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.” | The statement said the committee sees recent economic data “as consistent with growing underlying strength in the broader economy.” However, the statement continued, “The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.” |
| In their economic forecasts, also published Wednesday, Fed officials once again retreated from overly optimistic predictions about the pace of growth over the next several years. | In their economic forecasts, also published Wednesday, Fed officials once again retreated from overly optimistic predictions about the pace of growth over the next several years. |
| The aggregation of forecasts by the 17 officials who participate in policy-making showed that Fed officials expect growth to remain sluggish for years to come, with persistent unemployment and little inflation, suggesting that the dismantling of the Fed’s stimulus campaign will remain slow and cautious. | The aggregation of forecasts by the 17 officials who participate in policy-making showed that Fed officials expect growth to remain sluggish for years to come, with persistent unemployment and little inflation, suggesting that the dismantling of the Fed’s stimulus campaign will remain slow and cautious. |
| The middle of the forecast range for economic growth this year was 2 percent to 2.3 percent, down from June predictions of growth between 2.3 percent and 2.6 percent. For 2013, Fed officials forecast growth between 2.9 percent and 3.1 percent, down from a range of 3 percent to 3.5 percent in June. | The middle of the forecast range for economic growth this year was 2 percent to 2.3 percent, down from June predictions of growth between 2.3 percent and 2.6 percent. For 2013, Fed officials forecast growth between 2.9 percent and 3.1 percent, down from a range of 3 percent to 3.5 percent in June. |
| The Fed unrolled an aggressive combination of new policies last year in an effort to increase the pace of job creation. It started adding $85 billion a month to its holdings of Treasuries and mortgage bonds, and said it planned to keep buying until the outlook for the labor market improved substantially. The Fed also said that it would keep short-term rates near zero for even longer – at least as long as the unemployment rate remained above 6.5 percent. | The Fed unrolled an aggressive combination of new policies last year in an effort to increase the pace of job creation. It started adding $85 billion a month to its holdings of Treasuries and mortgage bonds, and said it planned to keep buying until the outlook for the labor market improved substantially. The Fed also said that it would keep short-term rates near zero for even longer – at least as long as the unemployment rate remained above 6.5 percent. |
| Half a year later, in June, Mr. Bernanke, surprised many investors by announcing that the Fed intended to cut back on those asset purchases by the end of the year, an intention the Fed affirmed in July. | Half a year later, in June, Mr. Bernanke, surprised many investors by announcing that the Fed intended to cut back on those asset purchases by the end of the year, an intention the Fed affirmed in July. |
| Critics had warned that the Fed would be pulling back too soon if it acted Wednesday. Economic growth remains sluggish and job creation is barely outpacing population growth. Roughly half the decline in the unemployment rate over the last year is because fewer people are looking for work, not because more are finding jobs. | Critics had warned that the Fed would be pulling back too soon if it acted Wednesday. Economic growth remains sluggish and job creation is barely outpacing population growth. Roughly half the decline in the unemployment rate over the last year is because fewer people are looking for work, not because more are finding jobs. |
| The share of American adults with jobs declined by more than four percentage points during the recession and has not recovered. Inflation also remains unusually sluggish, near the lowest pace on record. | The share of American adults with jobs declined by more than four percentage points during the recession and has not recovered. Inflation also remains unusually sluggish, near the lowest pace on record. |
| Fed officials have emphasized that they expect the economy to improve in the coming months. Monetary policy seeps slowly through the economy, and they say they are increasingly convinced that the economy will need less help. | Fed officials have emphasized that they expect the economy to improve in the coming months. Monetary policy seeps slowly through the economy, and they say they are increasingly convinced that the economy will need less help. |
| “The time is approaching when our economy will have enough momentum on its own without the need for additional monetary stimulus,” John C. Williams, president of the Federal Reserve Bank of San Francisco, said earlier this month. | “The time is approaching when our economy will have enough momentum on its own without the need for additional monetary stimulus,” John C. Williams, president of the Federal Reserve Bank of San Francisco, said earlier this month. |
| Proponents of aggressive asset purchases, including Mr. Bernanke, also face mounting pressure from internal critics who argue that the modest benefits of bond-buying are increasingly outweighed by the risk that the Fed is encouraging excessive speculation or interfering with normal market function. | Proponents of aggressive asset purchases, including Mr. Bernanke, also face mounting pressure from internal critics who argue that the modest benefits of bond-buying are increasingly outweighed by the risk that the Fed is encouraging excessive speculation or interfering with normal market function. |
| Some critics inside and outside the Fed have even begun to argue that the central bank’s bond-buying is preventing a return to normalcy. | Some critics inside and outside the Fed have even begun to argue that the central bank’s bond-buying is preventing a return to normalcy. |
| “The economy is positioned to benefit from modestly higher longer-term interest rates,” Ms. George said earlier this month. She noted that higher rates could increase the income of retirees and bolster bank profits without a commensurate increase in risk-taking. | “The economy is positioned to benefit from modestly higher longer-term interest rates,” Ms. George said earlier this month. She noted that higher rates could increase the income of retirees and bolster bank profits without a commensurate increase in risk-taking. |
| Despite their expectation for slower growth, the Fed’s economic forecasts Wednesday maintained their projections of a steady decline in the unemployment rate, although they still do not expect it to return to a normal level before 2017. Such a combination of slow growth and declining unemployment likely is possible only if Americans continue to give up on finding jobs, and thus are no longer counted as unemployed. | Despite their expectation for slower growth, the Fed’s economic forecasts Wednesday maintained their projections of a steady decline in the unemployment rate, although they still do not expect it to return to a normal level before 2017. Such a combination of slow growth and declining unemployment likely is possible only if Americans continue to give up on finding jobs, and thus are no longer counted as unemployed. |
| The Fed also continues to foresee little risk of excessive inflation. Price increases are currently running at an annual pace of around 1 percent, near the lowest level on record. Officials predicted inflation would not rise as high as 2 percent – the Fed’s official target – until 2015, and that it would remain there in 2016. | The Fed also continues to foresee little risk of excessive inflation. Price increases are currently running at an annual pace of around 1 percent, near the lowest level on record. Officials predicted inflation would not rise as high as 2 percent – the Fed’s official target – until 2015, and that it would remain there in 2016. |
| The consequences of these downbeat expectations could be seen in the downward drift of the predicted level of short-term rates at the end of 2015, from an average of 1.34 percent in the June forecast to an average of 1.25 percent in September. The averages, moreover, were skewed by the small group of officials who expect much higher rates. Only six officials predicted Wednesday that rates would be above 1 percent at the end of 2015, down from 9 officials in the June forecast. | The consequences of these downbeat expectations could be seen in the downward drift of the predicted level of short-term rates at the end of 2015, from an average of 1.34 percent in the June forecast to an average of 1.25 percent in September. The averages, moreover, were skewed by the small group of officials who expect much higher rates. Only six officials predicted Wednesday that rates would be above 1 percent at the end of 2015, down from 9 officials in the June forecast. |
| Two officials now expect that the Fed will not begin to raise rates until 2016. The forecasts are not associated with particular members of the committee, which includes 12 presidents of the regional reserve banks and five members of the Fed’s board of governors. One seat on the board is vacant, and another governor, Sarah Bloom Raskin, did not participate because she has been nominated to serve as deputy secretary of the Treasury Department. | Two officials now expect that the Fed will not begin to raise rates until 2016. The forecasts are not associated with particular members of the committee, which includes 12 presidents of the regional reserve banks and five members of the Fed’s board of governors. One seat on the board is vacant, and another governor, Sarah Bloom Raskin, did not participate because she has been nominated to serve as deputy secretary of the Treasury Department. |
| While the Fed postponed its retreat, the move is still being anticipated with apprehension in Europe and emerging markets, where borrowing costs for governments and businesses have risen since June. | While the Fed postponed its retreat, the move is still being anticipated with apprehension in Europe and emerging markets, where borrowing costs for governments and businesses have risen since June. |
| The Fed statements then “effectively brought monetary tightening forward in time,” the Bank for International Settlements in Basel, Switzerland, a clearinghouse for central banks worldwide, said in its quarterly report this week. | The Fed statements then “effectively brought monetary tightening forward in time,” the Bank for International Settlements in Basel, Switzerland, a clearinghouse for central banks worldwide, said in its quarterly report this week. |
| Investors who put their money into countries like China or Brazil in search of higher returns have been withdrawing it in the expectation of improving investment opportunities in the United States. That flow of wealth away from emerging nations could be particularly bad for German exporters, which have prospered by selling machinery and cars in Asia and Latin America. | Investors who put their money into countries like China or Brazil in search of higher returns have been withdrawing it in the expectation of improving investment opportunities in the United States. That flow of wealth away from emerging nations could be particularly bad for German exporters, which have prospered by selling machinery and cars in Asia and Latin America. |
| In an attempt to soften the market reaction, the European Central Bank has promised to keep its benchmark interest rate at a record low indefinitely. But analysts say it is unlikely that words alone will be enough to contain the pressure pushing up interest rates. | In an attempt to soften the market reaction, the European Central Bank has promised to keep its benchmark interest rate at a record low indefinitely. But analysts say it is unlikely that words alone will be enough to contain the pressure pushing up interest rates. |
| The Fed action also caused currency values to fluctuate more violently, which poses another risk for exporters. Foreign orders for German machinery, one of the country’s most important categories of exports, fell 9 percent in July from a year earlier, according to the German Engineering Federation, an industry group. Declines by currencies including the Indian rupee, which is down 7 percent against the euro since June, make German products more costly when purchased with the local currency. | The Fed action also caused currency values to fluctuate more violently, which poses another risk for exporters. Foreign orders for German machinery, one of the country’s most important categories of exports, fell 9 percent in July from a year earlier, according to the German Engineering Federation, an industry group. Declines by currencies including the Indian rupee, which is down 7 percent against the euro since June, make German products more costly when purchased with the local currency. |
| “The world has become more interdependent,” Norbert Reithofer, chief executive of the German automaker BMW, told reporters at the Frankfurt motor show last week. “When Ben Bernanke makes a statement, it has an effect on the Indian rupee, it has an effect on the Turkish lira, it has an effect on the South African rand. Economic circumstances we thought we could count on are no longer valid.” | “The world has become more interdependent,” Norbert Reithofer, chief executive of the German automaker BMW, told reporters at the Frankfurt motor show last week. “When Ben Bernanke makes a statement, it has an effect on the Indian rupee, it has an effect on the Turkish lira, it has an effect on the South African rand. Economic circumstances we thought we could count on are no longer valid.” |
Jack Ewing contributed reporting from Frankfurt. | Jack Ewing contributed reporting from Frankfurt. |