October 30, 2013

Fed leaves low interest-rate policy unchanged

Yet the Federal Reserve seems to signal that it thinks the economy is improving despite some recent weak data and uncertainties caused by the partial government shutdown.

By Ylan Q. Mui
The Washington Post

WASHINGTON — The Federal Reserve will keep its massive economic stimulus program intact, officials said Wednesday, amid concerns that the recovery remains fragile.

click image to enlarge

The decision of the Federal Reserve appears on a television screen on the floor of the New York Stock Exchange on Wednesday. The Fed said in a statement after a two-day policy meeting that it will keep buying $85 billion a month in bonds to keep long-term interest rates low and encourage more borrowing and spending.

The Associated Press

Their statement about the economy hardly changed from September and gave little direction as to when the central bank believes it can pull back its stimulus and allow the recovery to stand on its own.

The central bank has been pumping $85 billion a month into the economy for the past year in hopes of lowering long-term interest rates and encouraging consumers and businesses to open their wallets. Fed officials had hoped that by now the effort would have spurred stronger job growth and faster economic expansion.

In a statement Wednesday, the Fed’s policy-setting committee said the labor market has improved and economic growth was “moderate.” But the committee noted that unemployment is still high and that policies out of Washington have curtailed the recovery’s momentum.

The Fed dropped a reference to tightening financial conditions, which was in last month’s statement. But it pointed to a slowdown in the housing market, which has otherwise been one of the bright spots in the economy. Higher interest rates, coupled with a drop in consumer confidence during the government shutdown, dampened home sales this month.

Those factors made the Fed reluctant to pull back its bond-buying program and risk destabilizing the markets. Many economists do not expect the central bank to scale back until spring, after the new deadlines for agreement on the federal budget and the limit on government borrowing.

In its statement, the Fed emphasized the impact of fiscal policies over the past year — not just the shutdown and debt ceiling fights, but also the spending cuts known as the sequester and the payroll tax increase. But it said there is “growing underlying strength in the broader economy.”

Recent data suggest that, if anything, the economy has slowed in recent weeks. A report released Wednesday by the private payroll firm ADP estimated that 130,000 jobs were created in October, fewer than analysts had expected and a decline from the previous month. The government’s official tally of employment will be released Nov. 8.

“The government shutdown and debt-limit brinksmanship hurt the already-softening job market in October,” said Mark Zandi, chief economist at Moody’s Analytics, which compiles the report. “Any further weakening would signal rising unemployment.”

Meanwhile, inflation has remained exceptionally low despite the Fed stimulus. Government data released Wednesday show prices have risen just 1.2 percent over the past year. Some central bank officials have argued that weak inflation should be reason enough to keep its easy-money policies in place. But an increasingly vocal minority say the measures could be breeding financial instability.

The debate over when to pull back the stimulus has kept investors on edge.

When officials suggested several months ago that the Fed could start scaling back its stimulus by the end of the year, stock markets tanked. Officials have since backed away from that timeline – as well as the possibility of ending the program when the unemployment rate hits 7 percent. The major stock market indexes rallied briefly after the Fed’s statement was released but closed the day down slightly.

The Fed also has tried to distinguish between its temporary stimulus program, known as quantitative easing, and its commitment to keeping short-term interest rates near zero. The central bank has vowed not to raise rates at least until the unemployment rate reaches 6.5 percent or inflation rises above 2.5 percent. Most Fed officials anticipate the first rate increase will not occur until 2015.

By that time, the Fed will likely have a new leader. President Barack Obama has nominated the central bank’s vice chairman, Janet Yellen, for the top job once Chairman Ben Bernanke’s term ends in January.

Yellen must be confirmed by the Senate. Two lawmakers have pledged to block her if the nomination reaches the floor.

Sen. Lindsey Graham, R-S.C., said several times this week that he will hold the nomination – and every other White House appointment – unless the administration allows survivors of the terrorist attacks in Benghazi, Libya, to testify before Congress. In addition, Sen. Rand Paul, R-Ky., said last week that he will hold the nomination unless the Senate votes on his bill to increase transparency at the Fed.

The holds are unlikely to derail Yellen’s nomination, though they could delay the process. Her confirmation could still move forward with 60 votes of support.

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