Fed keeps $85 billion bond buying pace, sees disinflation risk

The Federal Reserve said it will maintain its $85 billion in monthly bond purchases and persistently low inflation could hamper the expansion.

“The committee recognizes that inflation persistently below its 2% objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington.

Chairman Ben S. Bernanke and his colleagues are debating when employment gains will be sufficient to warrant tapering bond buying that has swelled the Fed’s balance sheet to a record $3.57 trillion. Some policy makers have said the purchases, aimed at fueling growth and reducing 7.6% unemployment, risk creating asset-price bubbles.

Price increases have stayed below the central bank’s 2% target for more than a year. Bernanke told lawmakers July 17 that low inflation poses a risk to the economy, and policy makers “will act as needed” to ensure it rises toward their goal.

The central bank said its bond purchases will remain divided between $45 billion a month of Treasury securities and $40 billion a month of mortgage-backed securities. The Fed also will continue reinvesting securities as they mature.

The Fed repeated the pledge it has used since September that it will continue the purchases until the U.S. labor market outlook has improved substantially.

Rate Vow

Policy makers also left unchanged their commitment to hold the target interest rate near zero as long as the jobless rate remains above 6.5% and the outlook for inflation over one to two years doesn’t exceed 2.5%.

The Fed said that the economy “expanded at a modest pace during the first half of the year.” In the previous statement, it described the expansion as “moderate.”

The statement said housing has been “strengthening, but mortgage rates have risen somewhat, and fiscal policy is restraining economic growth.”

Kansas City Fed President Esther George dissented for the fifth meeting in a row, continuing to cite concern record accommodation may create financial and economic imbalances and increase long-term inflation expectations.

Bernanke, 59, said on June 19 that the FOMC may start scaling down bond buying later this year and halt it around the middle of 2014 as long as the economy performs in line with the committee’s expectations.

In semi-annual testimony to Congress on July 17, Bernanke said the labor market is “improving gradually” and that asset purchases “could be reduced somewhat more quickly” if the economy improved faster than expected. At the same time, he said the current pace of purchases “could be maintained for longer” if the employment outlook worsens.

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