The Federal Reserve will keep up its bond buying at a pace of $85 billion a month even as the world’s largest economy and the job market pick up.
“Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington. Recent data suggest “a return to moderate economic growth following a pause late last year.”
More than three years into the expansion, the central bank led by Chairman Ben S. Bernanke is pressing on with open-ended purchases of Treasury and mortgage securities to boost the pace of growth and heal a labor market still scarred by the deepest recession since the Great Depression.
The purchases will remain divided between $40 billion a month of mortgage-backed securities and $45 billion a month of Treasury securities. The Fed said that the purchases will continue until “the outlook for the labor market has improved substantially in a context of price stability” and that it will continue to reinvest maturing securities.
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% and inflation is projected to be no more than 2.5%.
Stocks and Treasury yields remained higher after the statement. The Standard & Poor’s 500 Index rose 0.5% to 1,556.02 at 2:04 p.m., and the yield on the 10-year Treasury note climbed to 1.94% from 1.9% late yesterday.
Kansas City Fed President Esther George dissented for the second meeting in a row, saying she was “concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.”
George has said holding interest rates near zero for too long risks creating financial bubbles. She said in January that prices of assets “such as bonds, agricultural land, and high- yield and leveraged loans are at historically high levels” and may signal market imbalances.
Policy makers lowered their expectations for the unemployment rate at the end of the year to a range of 7.3% to 7.5% from a previous forecast of 7.4% to 7.7%. The economy will expand 2.3% to 2.8% this year, they estimate, compared with their earlier forecast of 2.3% to 3% growth.
Central bankers last provided their forecasts in December. The Fed today released the policy makers’ quarterly economic forecasts at the same time as the statement. Previously, on days Bernanke held a press conference, the central bank released the statement at about 12:30 p.m. and the FOMC forecasts an hour and a half later. From now on, both will be released at 2 p.m.
Bernanke will hold a press conference at 2:30 p.m. in Washington to further explain the Fed’s statement and forecasts.
Forty-four of 45 economists in a Bloomberg survey March 13- 18 said the pace of purchases wouldn’t be reduced at today’s meeting. Fifty-eight% of economists in the survey said officials won’t reduce buying until the fourth quarter or later, while 55% said they expect the Fed to end its quantitative easing entirely in the first half of next year.
Since the Fed last met in January, stocks have climbed to new highs, with the Dow Jones Industrial Average exceeding its prior peak from October 2007. The index, which has gained more than 10% this year, remains near its record close at 14,539.14 on March 14. The yield on the benchmark 10-year Treasury advanced to an 11-month high of 2.06% on March 11.
Gains in house prices and construction will put more Americans to work this year, according to Bluford Putnam, chief economist at CME Group Inc., the Chicago-based owner of the world’s largest futures market, and a former economist at the Federal Reserve Bank of New York.
“This housing rebound is for real,” Putnam said before the FOMC statement. “We’re getting a decent number of housing starts, and homebuilder stocks have all spent last year recovering. For the first time in 2013 we can really count on the housing sector to create some jobs.”
Housing starts rose 0.8% in February to 917,000 homes at an annual rate, while building permits advanced 4.6% to 946,000, the highest level in almost five years, the Commerce Department said yesterday.
Fed officials still aren’t satisfied with progress in the labor market. The economy lost 8.8 million jobs as a result of the 18-month recession that ended in June 2009, and it has since regained 5.7 million.
“The job market remains generally weak, with the unemployment rate well above its longer-run normal level,” Bernanke told the Senate Banking Committee last month. “High unemployment has substantial costs, including not only the hardship faced by the unemployed and their families, but also the harm done to the vitality and productive potential of our economy as a whole.”
When the central bank began its third round of large-scale asset purchases in September, the most recent Labor Department report showed the unemployment rate was 8.1%. Joblessness fell to 7.7% in February.
President Barack Obama said last week that the primary goal of his second term is job creation, fueled by an effort to make the U.S. a magnet for manufacturing.
“Our top priority must be to do everything we can to grow our economy and create good, middle-class jobs,” Obama said in his Economic Report of the President. While the economy is adding jobs, too many Americans still can’t find full-time employment, he said.
Bright spots in the economy such as housing and autos may be dimmed by automatic budget cuts known as sequestration. The reductions went into effect at the beginning of this month, the start of $1.2 trillion of across-the-board cuts to be spread over nine years that will remain in place unless lawmakers and Obama agree on an alternative.
Congressional Budget Office Director Doug Elmendorf told lawmakers at a Feb. 13 hearing that the nonpartisan agency estimates the reductions would lower annual gross domestic product growth by 0.6% this year, enough to eliminate 750,000 jobs.
“The economy is doing better than it was in the fourth quarter,” said Michael Montgomery, a U.S. economist at IHS Global Insight in Lexington, Massachusetts. “The manufacturing sector is doing quite well. Offsetting that is recent evidence that we still haven’t absorbed all of the impact of the tax hikes that went into effect Jan. 1 and the impact of the sequester. That’s the unknown.”
The Fed’s asset purchases have helped support the recovery in the face of the government’s budget cuts and the 2 percentage point increase in the payroll tax that took effect in January.
The central bank’s mortgage bond purchases have driven home-loan rates to record lows. The national average 30-year fixed-rate mortgage was at 3.63% as of March 14, up from a record low 3.31% in November, according to an index from Freddie Mac.
JPMorgan Chase & Co. this week more than doubled its forecast for U.S. home-price gains in 2013 to 7% and predicts a more than 14% increase through 2015. Bank of America Corp. said this month property values will jump 8% this year, up from a prior estimate of 4.7%.
Retail sales climbed 1.1% in February, exceeding all projections in a Bloomberg survey of economists, for the biggest gain in five months. Sales are up 4.6% from a year earlier, according to a Commerce Department report.
Executives at Macy’s Inc., the second-largest U.S. department-store chain, feel “pretty good” about the U.S. economy and believe promotional events can help attract customers even after payroll taxes rose this year, according to Chief Financial Officer Karen Hoguet. The Cincinnati-based retailer last month posted annual profit that surpassed analysts’ estimates.
“We feel good about the consumer in 2013,” Hoguet said in a March 13 conference presentation sponsored by Bank of America. “Every indication we’re seeing is that he and she are doing fine, still buying.”