Fed to Continue Tapering Bond Purchases, Boosts Economic Assessment
DOW JONES & COMPANY, INC. 2:01 PM ET 07/30/14
WASHINGTON-The Federal Reserve said it would scale back its purchases of
mortgage and Treasury bonds to $25 billion monthly and responded
hours after a stronger-than-expected U.S. economic growth report
with a modestly more upbeat assessment of inflation, jobs and the
economy.
"Economic activity rebounded in the second quarter," the Fed said
in its July policy statement, noting the labor market is
improving, the jobless rate declining and inflation moving closer
to its 2% objective. It included a qualifier noting that a range
of indicators suggest their is still "significant" slack in the
job market.
The move kept the central bank on course to end the bond program
by October, a wind-down strategy officials have signaled in
recent public statements. The Fed launched the latest round of
purchases in September 2012, ran them at $85 billion per month at
their peak and began gradually winding them down in $10 billion
increments in January.
With that program on track to end, attention inside the Fed is
increasingly turning to the timing and mechanics of interest rate
increases. On this front, officials kept their cards
close to their chest, sticking to guidance on rates that they
have offered since March.
Short-term rates will stay low for "a considerable time after the
asset purchase program ends," the Fed said.
Charles Plosser, president of the Federal Reserve Bank of
Philadelphia, dissented, arguing that this guidance on interest
rates wasn't appropriate given the "considerable economic
progress" officials had already witnessed.
The central bank has kept its benchmark short-term rate - an
overnight bank lending rate called the fed funds rate - pinned
near zero since December 2008. Low rates are meant to encourage
borrowing, spending, investing and growth to boost the economy in
the near-term. The bond purchases were meant as added fuel, aimed
at holding down long-term interest rates and driving investors
into riskier assets.
With the economy apparently on a stronger path, the Fed is
looking to pull back its support.
The Commerce Department reported earlier Wednesday the economy
grew at a 4% annual rate in the second quarter, bouncing back
after a 2.1% first quarter contraction driven by bad weather.
Inflation also shows signs of firming after running below the
Fed's 2% target for the past two years.
Meantime the jobless rate declined to 6.1% in June, far faster
than anticipated. One of the more striking changes in the Fed's
updated assessment of the economy was the removal of a phrase
from earlier statements noting the jobless rate was elevated.
Instead, the Fed said:
"Labor market conditions improved, with the unemployment rate
declining further. However a range of labor market indicators
suggests that there remains significant underutilization of labor
resources."
The central bank also noted the movement of inflation toward its
target. In previous statements the Fed said inflation was running
below its 2% objective. In the latest statement it said inflation
had moved "somewhat closer" to the objective. Officials also said
the likelihood of inflation continuing to run below that target
had diminished.
Fed chairwoman Janet Yellen has said the timing of interest rate
increases would depend on how quickly inflation and the labor
market moved toward the Fed's long-run goals.
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(END) Dow Jones Newswires
07-30-141401ET
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