The Federal Reserve 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% 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.
Stocks extended losses after the statement. The Standard & Poor’s 500 Index declined 0.4% at 2:06 p.m. in New York. The yield on the 10-year Treasury note rose to 2.26% from 2.19% late yesterday.
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% and the outlook for inflation doesn’t exceed 2.5%.
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 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% to 7.3%, compared with 7.3% to 7.5% in their March forecasts. They predict the jobless rate will fall to 6.5% to 6.8% in 2014, compared with 6.7% to 7.0% in March.
Fifteen of 19 policy makers said the federal funds rate will be increased in 2015 or later. In March, 14 policy makers predicted an increase in 2015 or later.
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% in the year through April, matching the smallest gain since records started in 1960.
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% on June 11, the highest intraday level since April 2012. The benchmark 10-year yield was little changed yesterday at 2.19%.
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 S&P 500 Index tumbled 3.6% between May 21 and June 5, the steepest such decline since November. The benchmark gauge for American equities rose 0.8% 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% last week, according to data compiled by Freddie Mac.
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.
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% 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% 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% in 2011, the lowest since 1983. The ratio rose to 58.6% 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% 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% 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.