Fed leaves stimulus intact

September 18, 2013

The Federal Reserve will continue its extraordinary efforts to prop up the nation’s recovery with billions of dollars in stimulus, officials said Wednesday, essentially declaring the economy too weak to stand on its own.

Stock markets soared to record highs as investors welcomed the unexpected announcement of more stimulus. But the Fed’s message about the recovery was not so rosy, and officials again cut their forecasts for economic growth.

Chairman Ben S. Bernanke warned that the impending showdowns over the federal budget and the debt ceiling could have dire consequences for the economy. He cautioned that higher mortgage rates could choke the housing recovery. And although he cited “meaningful progress” in getting Americans back to work, he acknowledged that much of the decline in the unemployment rate was the result of people giving up looking for jobs rather than a pickup in hiring.

“It was a precautionary step,” Bernanke told reporters during a news conference Wednesday. “It is avoiding a tightening until we can be comfortable that the economy is, in fact, growing the way we want it to be growing.”

The central bank’s reluctance to pull on the reins of the economy — even by a little bit — underscores just how fragile the recovery remains. The last time the Fed tried to jump-start the economy through buying bonds, a process known as quantitative easing, it was criticized for cutting off the program before the economy had fully healed. The decision to stay the course now shows that officials are determined not to make the same mistake again.

And they are growing more pessimistic about the economy. Fed forecasts for growth in the nation’s gross domestic product range from 2 to 2.3 percent this year, down from the 2.3 to 2.6 percent predicted over the summer. GDP growth is expected to pick up to between 2.9­ percent and 3.1 percent next year.

“The Fed decided to do what it thought was best for the economy at this time, as opposed to acting in accordance with market expectations,” said Alan MacEachin, an economist at Navy Federal Credit Union.

Bernanke stressed that the future of the Fed’s bond-buying program will depend on the strength of the recovery. He played down a timeline he previously outlined over the summer that called for reducing the $85 billion in monthly purchases this year and ending them in mid-2014, when the unemployment rate was expected to be about 7 percent.

“There is not any magic number that we are shooting for,” Bernanke said. “We’re looking for overall improvement in the labor market.”

But much of the incoming economic data have been murky. The economy expanded at a 2.5 percent annual rate during the second quarter, but job growth has come in fits and starts. Hiring has fallen short of many analysts’ expectations.

Meanwhile, rising interest rates could threaten the main engine of growth: housing. Interest rates on 30-year mortgages have jumped by a percentage point since April. Major lenders have reported double-digit declines in demands for home loans, while refinancing has stalled as rates creep up.

“Like a lot of things in life, if you wait for the perfect time to taper, then you probably will never start,” said Richard Moody, chief economist for Regions Financial Corp. The Fed “isn’t necessarily looking for the perfect time, but with slack labor market conditions and tame inflation, they at least have the luxury of waiting for a better time.”

Bernanke emphasized that even after the Fed stops buying long-term bonds, it will still keep short-term interest rates near zero. The Fed has promised not to raise them at least until the unemployment rate reaches 6.5 percent or inflation rises above 2.5 percent.

On Wednesday, he suggested the bar could be moved even further. The first increase in rates might not come until the jobless rate is “considerably below” 6.5 percent. He also said that setting a minimum level for inflation could be a “sensible modification.”

But Bernanke almost certainly will not be there to moderate that debate. His term as chairman ends in January, and a White House official said Wednesday that the Fed’s second-in-command, Janet Yellen, is the leading candidate to replace him.

The nomination would put an end to months of controversy over who should lead the central bank. President Obama’s former economic adviser Lawrence H. Summers was the preferred choice of the administration, but he removed his name from consideration this week after opposition from Democrats threatened his prospects for being confirmed by the Senate.

The unusually public and acrimonious battle for the top job at the Fed had increased anxiety among investors already skittish about a pending pullback in stimulus. But Bernanke dismissed those concerns Wednesday, even as he remained silent on his personal plans.

“I’m not particularly concerned about the political environment for the Federal Reserve,” he said. “I think the Fed will continue to be an important institution in the United States and that it will maintain its independence going forward.”

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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