More Forceful Fed Stands by Stimulus
By BINYAMIN APPELBAUM - New York Times
WASHINGTON — The Federal Reserve said Wednesday that its economic stimulus campaign would press forward at the same pace it has maintained since December, putting to rest for now any suggestion that it was leaning toward doing less.
The Fed emphasized that it was ready to increase or decrease its efforts to spur growth and reduce unemployment as necessary, a more balanced position than it took earlier in the year, reflecting the reality that a strong winter has once again yielded to a disappointing spring.
It was the first time that the Fed had explicitly mentioned the possibility of doing more in a policy statement, although officials, including the Fed’s chairman, Ben S. Bernanke, have made the point repeatedly in public remarks.
Analysts disagreed about the central bank’s intent. Some saw it as a signal that the Fed’s next move could be an expansion of its stimulus.
Others, however, said the Fed was simply underscoring that it did not plan to reduce its asset purchases. It is buying $85 billion a month in Treasury and mortgage-backed securities.
“I don’t think there’s much chance of them stepping it up,” said Jim O’Sullivan, chief United States economist at High Frequency Economics in New York. “But this is certainly their way of saying there’s no bias toward scaling down.”
The Fed maintained a relatively sunny economic outlook in its statement, released after a two-day meeting of its policy-making committee. It said that the economy was expanding at a “moderate pace” and that the labor market had shown “some improvement.” It added, however, that federal spending cuts were “restraining economic growth,” an implicit critique of the rest of the government.
That language was stronger than the Fed had used in previous assessments of the economic impact of fiscal policy. Fed officials have repeatedly expressed frustration that fiscal policy is working at cross-purposes with their own monetary policy. The statement also noted that the pace of inflation had slackened, a potential sign of economic weakness. Bringing the annual rate of inflation closer to its target of 2 percent has been a primary goal of the Fed’s four-year-old stimulus campaign, but the statement expressed little concern about the recent deceleration to a pace of only about half that level.
Investors and the Fed have taken the view that inflation is likely to return to a more normal pace without additional effort.
“The committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline” to a level the Fed regards as acceptable, the statement said.
Michael Feroli, chief United States economist at JPMorgan Chase, said the stability of the Fed’s economic outlook suggested that policy, too, would remain stable.
“In effect, the Fed signaled that the pace of asset purchases would be data dependent in both directions, but that right now the data gives them little reason to change in either direction,” Mr. Feroli wrote Wednesday in a note to clients.
The statement won support from 11 of the Federal Open Market Committee’s 12 members. Esther George, the president of the Federal Reserve Bank of Kansas City, cast the dissenting vote, as she has at each meeting this year, citing concerns about potential “economic and financial imbalances” and the risk of excessive inflation.
The pace of economic growth appeared to slow in the weeks between the Fed’s previous meeting and the one this week. Inflation slackened in March to the slowest pace in two years, while employers added the fewest jobs in any month since last summer. And economists say that the pain of federal spending cuts is just beginning to tell.
Inflation was 1.1 percent during the 12 months ending in March, according to the most recent data from the Fed’s preferred inflation gauge, the Commerce Department’s index of personal consumption expenditures. That is well below the 2 percent annual pace that the Fed considers healthy.
The share of Americans with jobs has not increased since the recession.
The central bank is modestly expanding its stimulus campaign each month, as it increases the size of its bond portfolio. The Fed’s most recent economic projections, published in March, showed most officials expected persistently low inflation and persistently high unemployment for years to come.
Officials, however, are reluctant to do more. They see modest benefits and uncertain costs in buying more bonds. The volume of the Fed’s first-quarter purchases already roughly equaled the volume of new mortgage bond issuance and about 72 percent of the volume of new issuance of long-term federal debt.
And the Fed already has tied the duration of low interest rates to the unemployment rate, announcing in December that it intended to hold its benchmark short-term interest rate near zero at least as long as the unemployment rate remained above 6.5 percent, provided that inflation remained under control.
An official account of the Fed’s previous meeting, in March, showed that officials discussed reducing the monthly volume of bond purchases. Some officials who supported the purchase program when it began last year said they saw evidence that the economy was growing more quickly, and that the Fed might be able to curtail the volume of its asset purchases by the third quarter.
An account of this week’s meeting will be released in three weeks, providing a comparable look at the latest round of internal debate. But analysts said that the changed language in the statement reflected a shift in that debate.
The statement said, “The committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” The Fed’s previous statement said it would adjust the level of purchases based on economic conditions.
Michael Gapen, director of United States economic research at Barclays Capital, wrote in a note to clients that the statement was “a fairly obvious nod to some of the recent softness in economic activity, labor markets and inflation.” He said it reinforced his view that the Fed would maintain its $85 billion pace through the end of the year.
The Fed also could increase the impact of its campaign by telling investors how long it will run — either in terms of a date or an economic target. But officials say that it has been impossible to reach a consensus on that issue.
