The Fed acknowledged the weak pace of growth during the first half of the year, describing the rate as “modest” rather than “moderate,” but maintained its forecast that “economic growth will pick up from its recent pace,” according to a statement published after the committee’s two-day meeting.
The Fed also noted the sluggish pace of inflation, which has dropped to the lowest pace on record, but said that it continued to expect a rebound.
As usual, the Fed maintained its flexibility, noting that it was ready to increase or decrease its stimulus campaign as warranted by economic conditions.
The decision was supported by 11 of the 12 members of the Federal Open Market Committee. The sole dissenter was Esther L. George, president of the Federal Reserve Bank of Kansas City, who has dissented at each meeting this year, citing the risks of financial destabilization and higher inflation.
The committee had little time to digest the latest economic data. The government announced earlier Wednesday that the economy expanded at an annual rate of 1.7 percent in the second quarter, better than economists had expected but below the pace that Fed officials regard as necessary to create enough jobs to bring down the unemployment rate. The Fed has predicted faster growth in the second half of the year.
The Fed’s chairman, Ben S. Bernanke, surprised investors after the committee’s last meeting in June by announcing that the central bank expected to reduce the volume of its monthly asset purchases later this year, and to end the purchases by the middle of next year, provided that economic growth met the Fed’s expectations. The central bank has increased its holdings of mortgage-backed securities and Treasury securities by $85 billion a month since December.
Interest rates rose in response, undermining the purpose of the bond-buying program, but Fed officials have not backed away from that timeline. Mr. Bernanke and others have said that if the economy needs more help, they would rather lean on other tools, like the policy of holding short-term interest rates near zero.
The Fed has said that it intends to maintain that policy at least as long as the unemployment rate remains above 6.5 percent and likely for some time thereafter as long as inflation remains under control. The rate was 7.6 percent in June.
Mr. Bernanke described this as “a change in the mix of tools” in testimony before the House Financial Services Committee earlier this month.
The shift in strategy appears to reflect a reassessment of the potential costs of asset purchases. A number of Fed officials have expressed concern that the bond-buying could destabilize markets, for example by reducing the supply of low-risk assets, thus distorting prices or encouraging speculation. Other economists, including Lawrence H. Summers, a leading candidate to succeed Mr. Bernanke at the Fed, have expressed similar concerns about the purchases.
The Fed has also faced persistent questions about the benefits of the purchases. Mr. Bernanke and his allies say the bond-buying, by reducing borrowing costs, has contributed to a recent rise in home and auto purchases. Other economists, however, regard these effects as minor at best.
Fed officials and supportive economists also have suggested that the central bank’s asset purchases are valuable in convincing investors that the central bank is maintaining its long-term commitment to suppressing borrowing costs. As long as the Fed is buying bonds, it is not about to start raising rates.
Article source: http://www.nytimes.com/2013/08/01/business/economy/fed-maintains-course-on-policy.html?partner=rss&emc=rss