As Congressional Republicans and the White House hurtle toward another showdown over federal spending, the Fed said it was concerned that fiscal policy once again “is restraining economic growth,” threatening to undermine what the Fed had described just months ago as a recovery gaining strength.
Stock markets jumped after the 2 p.m. announcement, with the Standard Poor’s 500-stock index touching a record high and the Dow Jones industrial average ahead more than 150 points.
The Fed’s decision also may reflect the consequences of yet another premature retreat from its own policies. Mortgage rates have climbed and other financial conditions have tightened since the Fed signaled in June that it intended to reduce its asset purchases by the end of the year, the Fed noted Wednesday.
“The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and the labor market,” it said in a statement released after a regular two-day meeting of its policy-making committee.
The decision, an apparent victory for the Fed’s chairman, Ben S. Bernanke, and his allies who have argued for the benefits of asset purchases, was supported by all but one member of the Federal Open Market Committee. Esther George, president of the Federal Reserve Bank of Kansas City, dissented as she has at each previous meeting this year, citing concerns about inflation and financial stability.
The Fed may still begin to reduce asset purchases by the end of the year, consistent with its previous statements. The Fed also refrained from any change in its stated intention to hold short-term interest rates near zero at least as long as the unemployment rate remains above 6.5 percent.
The statement said the committee sees recent economic data “as consistent with growing underlying strength in the broader economy.” However, the statement continued, “The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”
In their economic forecasts, also published Wednesday, Fed officials once again retreated from overly optimistic predictions about the pace of growth over the next several years.
The aggregation of forecasts by the 17 officials who participate in policy-making showed that Fed officials expect growth to remain sluggish for years to come, with persistent unemployment and little inflation, suggesting that the dismantling of the Fed’s stimulus campaign will remain slow and cautious.
The middle of the forecast range for economic growth this year was 2 percent to 2.3 percent, down from June predictions of growth between 2.3 percent and 2.6 percent. For 2013, Fed officials forecast growth between 2.9 percent and 3.1 percent, down from a range of 3 percent to 3.5 percent in June.
The Fed unrolled an aggressive combination of new policies last year in an effort to increase the pace of job creation. It started adding $85 billion a month to its holdings of Treasuries and mortgage bonds, and said it planned to keep buying until the outlook for the labor market improved substantially. The Fed also said that it would keep short-term rates near zero for even longer – at least as long as the unemployment rate remained above 6.5 percent.
Half a year later, in June, Mr. Bernanke, surprised many investors by announcing that the Fed intended to cut back on those asset purchases by the end of the year, an intention the Fed affirmed in July.
Critics had warned that the Fed would be pulling back too soon if it acted Wednesday. Economic growth remains sluggish and job creation is barely outpacing population growth. Roughly half the decline in the unemployment rate over the last year is because fewer people are looking for work, not because more are finding jobs.
Jack Ewing contributed reporting from Frankfurt.
Article source: http://www.nytimes.com/2013/09/19/business/economy/fed-in-surprise-move-postpones-retreat-from-stimulus-campaign.html?partner=rss&emc=rss