“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year,” Bernanke said, referring to the FOMC’s outlook for “moderate” economic growth, further labor-market gains and inflation accelerating toward the Fed’s 2% goal.
If such gains are maintained, “we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year,” he said. A “strong majority” on the FOMC now expects it won’t sell mortgage-backed securities as part of their exit strategy.
The chairman’s description of the end of quantitative easing indicates that Fed officials see the economy finally healing from a burst credit bubble that deflated housing prices by 35% over almost six years, left one in 10 American workers unemployed in October 2009 and prompted the biggest overhaul of financial regulation since the 1930s.
The U.S. central bank began its third round of large-scale asset purchases in September by buying $40 billion a month of mortgage-backed securities. The Fed added $45 billion of Treasury purchases in December. The FOMC has said since September that it will buy bonds until seeing signs of substantial labor-market improvement.
The FOMC’s forecasts show the economy needs to cross some hurdles before meeting the criteria for a slowing of bond purchases. Officials expect the economy to grow 3% to 3.5% next year, driving the unemployment rate down to 6.5% to 6.8% from 7.6% in May, according to their central tendency estimates, which exclude the three highest and three lowest.
Economists in a Bloomberg survey are less optimistic. They estimate the economy will grow 1.9% in 2013 and 2.7% in 2014, according to the median estimates.
Bernanke said he was “deputized” by policy makers to deliver the message for reduced bond buying rather than rely on a “terse” written statement.
The committee in a statement yesterday made no changes to its current pace of monthly purchases. 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.”