June 19 (Bloomberg) -- The Federal
Reserve said it will keep buying bonds at a pace of $85 billion a month and
said that risks to the economy have decreased.
“The committee sees downside the
risks to the outlook for the economy and the labor market as having diminished
since the fall,” the Federal Open Market Committee said today at the conclusion
of a two-day meeting in Washington. It repeated that it’s prepared to increase
or reduce the pace of purchases depending on the outlook for the job market and
inflation.
Chairman Ben S. Bernanke is
expanding the Fed’s balance sheet toward $4 trillion as he seeks to reduce a
jobless rate that stands at 7.6 percent after four years of economic growth.
Investor concern that the Fed may soon start to reduce the
pace of asset purchases this month pushed 10-year Treasury yields to a 14-month
high.
Bernanke, 59, is scheduled to
explain the Fed’s actions at a 2:30 p.m. press conference in Washington.
The Fed also left unchanged its
statement that it plans to hold its target interest rate near zero as long as
unemployment remains above 6.5 percent and the outlook for inflation doesn’t
exceed 2.5 percent.
The Fed’s bond purchases will
remain divided between $40 billion a month of mortgage-backed securities and
$45 billion a month of Treasury securities. The central bank also will continue
reinvesting securities as they mature.
The Fed repeated that it will keep
buying assets “until the outlook for the labor market has improved
substantially.”
Labor Market
“Labor market conditions have shown
further improvement in recent months, on balance, but the unemployment rate
remains elevated,” the committee said. “Partly reflecting transitory
influences, inflation has been running below the committee’s longer-run
objective, but longer term inflation expectations have remained stable.”
Fed officials lowered their
forecasts for the unemployment and inflation rates this year.
They now see a jobless rate of 7.2
percent to 7.3 percent, compared with 7.3 percent to 7.5 percent in their March
forecasts. They predict the jobless rate will fall to 6.5 percent to 6.8
percent in 2014, compared with 6.7 percent to 7.0 percent in March.
Fourteen of 19 policy makers said
the federal funds rate will be increased in 2015. In March, 13 policy makers
predicted an increase in 2015.
Bullard
Dissents
St. Louis Fed President James
Bullard dissented, saying the committee should “signal more strongly its
willingness to defend its inflation goal in light of recent low inflation
readings.”
Kansas City Fed President Esther
George dissented for the fourth meeting in a row, continuing to cite concern
that keeping the benchmark interest rate near zero risks creating “economic and
financial imbalances,” including asset price bubbles.
No change in policy was expected at
today’s meeting. Fifty- eight of 59 economists in a June 4-5 Bloomberg Survey
predicted the central bank would maintain the pace of purchases.
Investors are scrutinizing the
Fed’s communications for signs the period of unprecedented stimulus is coming
to an end as the economy makes recovers from the longest and deepest recession
since the Great Depression.
Inflation is providing little
impetus for a tapering in bond purchases. A gauge of consumer prices excluding
food and energy that is watched by the Fed rose 1.1 percent in the year through
April, matching the smallest gain since records started in 1960.
Treasury Bonds
Speculation that an improving
economy will prompt Fed policy makers to reduce bond buying last month
triggered the biggest jump in 10-year Treasury yields since December 2010. The
yield hit 2.29 percent on June 11, the highest intraday level since April 2012.
The benchmark 10-year yield was little changed yesterday at 2.19 percent.
About $2 trillion has been erased
from the value of global equities since Bernanke told U.S. lawmakers on May 22
that the FOMC “could” consider reducing bond purchases within “the next few
meetings” if officials see signs of improvement in the labor market and are
convinced the gains can be sustained.
The Standard & Poor’s 500 Index
tumbled 3.6 percent between May 21 and June 5, the steepest such decline since
November. The benchmark gauge for American equities rose 0.8 percent yesterday
to 1,651.81.
Mortgage rates have soared the most
in a decade on speculation the Fed’s purchases may slow. The interest rate on a
30-year fixed home loan climbed to a 14-month high of 3.98 percent last week,
according to data compiled by Freddie Mac.
Over Reacting
Investors may be over-reacting to
the prospect of a reduction in the pace of bond purchases, said Nathan Sheets,
the former head of the Fed’s international finance division.
“Tapering is not a reduction in
stimulus,” said Sheets, now the global head of international economics at
Citigroup Inc.
in New York. “The Fed will still be buying, still removing
duration from the market.”
Bernanke is nearing the end of his
second four-year term, a period marked by unprecedented measures to battle the
deepest recession since the 1930s and then to keep the economy growing at a
pace that’s brisk enough to put millions of unemployed Americans back to work.
The former Princeton professor cut
the Fed’s target interest rate almost to zero in December 2008 and has led the
central bank in three rounds of large-scale asset purchases, or quantitative
easing, that have swelled the Fed’s balance sheet to a record $3.41 trillion.
President Barack Obama, in an
interview on PBS this week, provided one of the clearest signals yet that
Bernanke may not remain beyond the end of his term on Jan. 31. Bernanke
“already stayed a lot longer than he wanted or he was supposed to,”
Obama said.
Gains Strength
The labor market has gained
strength since the Fed began the latest round of asset purchases in September.
Employers added 175,000 jobs in May, and the country has regained 6.3 million
jobs since 2010, 72 percent of those lost in the aftermath of the recession.
“The economy is recovering, and
there’s a great deal of strength behind it,” said Andrew Wilkinson, chief
economic strategist at Miller Tabak & Co. in New York, citing gains in
construction and employment and rising retail sales. “People are going out and
spending, not keeping the pocketbook closed.”
Still, unemployment has exceeded
7.5 percent since January 2009, the longest stretch of such high joblessness
since the depression. The ratio of workers to the total population fell to
58.2 percent in 2011, the lowest since 1983. The ratio rose
to
58.6 percent in May.
Slowing global growth and federal
government budget cuts are taking a toll on the world’s largest economy.
Manufacturing unexpectedly shrank in May at the fast pace in four years,
according to figures from the Institute for Supply Management.
“The uncertainty that continues in
Washington has an adverse effect on confidence,” Jeffrey Smisek, chief
executive officer of United Continental Holdings Inc. in Chicago, the world’s largest
airline, said in a June 14 presentation. “We don’t see a degradation in the
United States demand, but we don’t see a significant improvement.”
A rebound in housing, fueled by
record-low mortgage rates, has shored up the expansion. Home prices rose 10.9
percent in the 12 months through March, according to the S&P/Case Shiller
index of property values in 20 cities, the biggest annual gain since April
2006.
Blackstone Group LP Chief Executive
Officer Stephen Schwarzman said this month housing has been a “big winner” in
the economy.
The world’s biggest
alternative-asset manager has spent $5 billion to acquire almost 30,000 U.S.
single-family houses in a bet home prices will maintain gains. New York-based
Blackstone has jumped 38 percent this year before today, more than double the
gain for the S&P 500.
“You are seeing a lot of strength
in housing and it’s coming from almost every place geographically,” Schwarzman
said in a June 11 presentation to investors.
For Related News and Information:
Inflation at 53-Year Low Gives Bernanke Time to Press on
With QE NSN MOMBEQ6TTDS8 <go> Bernanke-Draghi-Kuroda Failure to
Communicate Boosts Bond Yields NSN MOIA6L6KLVR5 <go> Bernanke’s Tapering
Talk Backfires Amid Surge in Bond Yields NSN MOC5J50UQVI9 <go> Federal
Reserve rates, data, news, statements: FED <GO> Federal Reserve balance
sheet graph: FARBAST INDEX GP W <GO> News about quantitative easing: STNI
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<GO> Top economy news: TOP ECO <GO> World economic statistics: ECST
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--Editors: James Tyson, Christopher Wellisz
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