This article is from the source 'nytimes' and was first published or seen
on .
It last changed over 40 days ago and won't be checked again for changes.
In Surprise, Fed Decides Not to Curtail Stimulus Effort
In Surprise, Fed Decides Not to Curtail Stimulus Effort
(about 5 hours later)
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 — It turns out that the Federal Reserve is not quite ready to let go of its extra efforts to help the economy grow.
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.
All summer, Federal Reserve officials said flattering things about the economy’s performance: how strong it looked, how well it was recovering, how eager they were to step back and watch it walk on its own.
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.
But in a reversal that stunned economists and investors on Wall Street, the Fed said Wednesday that it would postpone any retreat from its monetary stimulus campaign for at least another month and quite possibly until next year. The Fed’s chairman, Ben S. Bernanke, emphasized that economic conditions were improving. But he said the Fed still feared a turn for the worse.
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.
He noted that Congressional Republicans and the White House were hurtling toward an impasse over government spending. That was reinforced on Wednesday, when House leaders said they would seek to pass a federal budget stripping all funds for President Obama’s signature health care law, increasing the chances of a government shutdown.
“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.
And the Fed undermined its own efforts when it declared in June that it intended to begin a retreat by the end of the year, causing investors to begin immediately demanding higher interest rates on mortgage loans and other financial products, a trend that the Fed said Wednesday was threatening to slow the economy.
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.
“We have been overoptimistic,” Mr. Bernanke said at a news conference. The Fed, he said, is “avoiding a tightening until we can be comfortable that the economy is in fact growing the way that we want it to be growing.”
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.
Investors cheered the Fed’s hesitation. The Standard & Poor’s 500 stock-index rose 1.22 percent, to close at a record high, in nominal terms. Interest rates also fell; the yield on the benchmark 10-year Treasury reversed some of its recent rise.
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.”
Some analysts, however, warned that the unexpected announcement was likely to compound confusion about the Fed’s plans, increasing the volatility of the markets in the coming months as investors sort through the Fed’s mixed messages about how much longer it plans to continue its bond-buying campaign. The delay also means that the decision to retreat may ultimately be made by the next Fed chief, after Mr. Bernanke steps down at the end of January. President Obama has said that he plans to nominate a replacement as soon as next week. Janet Yellen, the Fed’s vice chairwoman, is the leading candidate.
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 Fed unrolled an aggressive combination of new policies last year in an effort to encourage a housing recovery and increase the pace of job creation. It started adding $85 billion a month to its holdings of Treasury securities and mortgage-backed securities, to help keep long-term borrowing costs down, 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 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.
Half a year later, in June, Mr. Bernanke surprised many investors by announcing that the Fed intended to start cutting back on those asset purchases by the end of 2013. Fed officials reiterated that intention in July, and several officials had since suggested that the Fed might begin to pull back at the September meeting.
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.
Some critics question the Fed’s assessment of the economy, in particular its claim that a declining unemployment rate is a sign of progress. They note that unemployment is falling in part because fewer people are looking for work, and therefore are no longer officially counted as unemployed.
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 now appears to be giving that argument greater credence, and on Wednesday Mr. Bernanke played down the Fed’s earlier use of unemployment rate thresholds to describe the goals for its policies. He refused to repeat a comment he had made in June that the Fed planned to keep buying bonds until the unemployment rate reached roughly 7 percent. He also emphasized that the Fed was likely to keep short-term rates near zero well after unemployment fell below 6.5 percent, the threshold the Fed had established last year.
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.
The Fed’s concern, he suggested, is that things could get worse, either because of new cuts in federal spending, a political impasse in Washington over fiscal matters that threatened to undermine the economy, or because the Fed pulled back prematurely.
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.
Fiscal policy “is restraining economic growth,” the Fed said in a statement after a regular two-day meeting of the Federal Open Market Committee. It added, “The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and the labor market.”
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.
Mr. Bernanke sought to explain the Fed’s hesitation in more detail. He said the Fed wanted to see three things: Evidence that the drag from fiscal policy is diminishing, inflation is returning to a healthy level, and job growth is sustainable.
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.
“If it does,” he said, “we’ll take the first step at some point, possibly later this year.”
“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 decision was supported by 9 of the 10 voting members 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 committee was short two members, because of the recent retirement of former governor Elizabeth Duke and the recusal of governor Sarah Bloom Raskin, nominated to be deputy Treasury secretary.
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.
In their economic forecasts, also published Wednesday, Fed officials retreated from overly optimistic predictions about the pace of growth over the next several years, as they have done repeatedly since the end of the recession. The aggregation of forecasts showed that Fed officials now expect growth to remain sluggish for years to come, with persistent unemployment and little inflation.
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 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.
“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.
While the Fed postponed its retreat, interest rates remained higher than before it started talking about tapering, in the United States, Europe and in emerging markets. 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.
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.
Investors who put their money into countries like China or Brazil in search of higher returns have been withdrawing it as investment opportunities improve in the United States. That outflow of wealth is also bad for export-driven economies like Germany. Foreign orders for German machinery fell 9 percent in July from a year earlier, according to the German Engineering Federation, an industry group.
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.
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 keep rates low.
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 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.”
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.
“We are going to be confronted with this situation more and more often,” Mr. Reithofer said.
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.
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.
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.”
