Fed Maintains Rates and Strategy

WASHINGTON — The Federal Reserve produced no surprises on Wednesday, affirming that it would plow ahead with its efforts to stimulate the economy even as it hailed “a return to moderate economic growth following a pause late last year.”

The Fed under its chairman, Ben S. Bernanke, has made clear that it regards its program of low interest rates and large asset purchases as necessary for the economy to keep growing fast enough to return unemployment to normal levels.

In a statement issued after a two-day meeting of its policy-making committee, the Fed reiterated that it would continue to hold short-term interest rates near zero at least until the unemployment rate falls below 6.5 percent, which forecasters expect no sooner than 2015. The February unemployment rate was 7.7 percent.

To hasten that process, the central bank said it also would keep to buy $85 billion a month in Treasury and mortgage-backed securities.

While spending by consumers and businesses has increased recently, the Fed noted that fiscal policy “has become somewhat more restrictive.”

“The committee continues to see downside risks to the economic outlook,” the statement said.

The decision was supported by 11 members of the Federal Open Market Committee. Esther George, the president of the Federal Reserve Bank of Kansas City, recorded the only dissent, as she did in January, again citing her concerns that the Fed’s efforts could destabilize markets and seed future inflation.

The Fed separately released economic forecasts by 19 of its senior officials showing a slight strengthening in the consensus view that the central bank will need to suppress short-term interest rates for several more years. While a majority of the officials continued to predict that the Fed would begin to raise its benchmark interest rate by the end of 2015, the average predicted rate declined slightly as a number of officials shifted forecasts downward.

In keeping with that shift, the officials’ expectations for the economy soured slightly. They predicted that the economy would expand between 2.3 and 2.8 percent this year, down from their December forecast of growth between 2.3 and 3 percent. The consensus forecast for 2014 also fell. Officials now expect growth between 2.9 and 3.4 percent in 2014, compared to a December forecast of growth between 3 and 3.5 percent.

Concerns about inflation remained in abeyance. Fed officials do not expect inflation above 2 percent over the next three years, well below their self-imposed ceiling of 2.5 percent inflation. They forecast slightly less inflation during the current year and slightly more by 2015, as compared with their December projections.

At the same time, officials were modestly more optimistic about job growth. They predicted that the unemployment rate would rest between 6.7 and 7 percent at the end of 2014. In December they had predicted that the rate would sit between 6.8 and 7.3 percent at the end of 2014.

The unusual rigidity of the Fed’s basic course has diminished the importance of the regular meetings of its policy-making committee. Unless economic circumstances change dramatically, the year could pass without significant action.

Dissenters on the policy-making committee – most of whom are not voting members this year — have increased the volume of their protestations in recent months. Increasingly, the focus of their concerns has shifted from the specter of future inflation to the possibility that asset purchases and low interest rates will destabilize financial markets.

Historically, such divisions often presaged a turn, or at least a moderation, in the thrust of Fed policy. But analysts who follow the central bank see little evidence of a shift in the current debate. They say that Mr. Bernanke and his allies remain firmly in control and do not seem inclined to take further steps to appease the concerns of the minority.

“The hawks are nothing more than an irritant,” Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisers, wrote in a note to clients ahead of Wednesday’s announcement. “The chairman will be unmoved by their protestations, not least because their fears that QE would spark rampant inflation have been so wide of the mark,” he wrote, referring to the Fed’s quantitative easing.

In the absence of major business, the committee has turned its attention to fine-tuning its current efforts. It is considering changes to improve the clarity of its public communications and in the details of its plan to unwind its huge investment portfolio. More details about those discussions are likely to emerge in three weeks, when the Fed publishes an account of its meetings Tuesday and Wednesday.

Article source: http://www.nytimes.com/2013/03/21/business/economy/fed-maintains-rates-and-strategy.html?partner=rss&emc=rss