In Wednesday’s statement, the Fed said it is concerned that unless it continues to provide stimulus, “economic growth might not be strong enough to generate sustained improvement in labor market conditions.”
It noted that consumer spending has quickened but that business investment has slowed. Inflation also picked up because of higher energy prices but is stable overall, the Fed said.
“Growth in employment has been slow, and the unemployment rate remains elevated,” the policy statement said. Repeating its language from last month, the Fed said its policies will “remain appropriate for a considerable time after the economic recovery strengthens.”
Before deciding on any policy changes, the Fed is likely to spend more time taking stock of last month’s aggressive actions. Fed measures have pushed interest rates — especially mortgage rates — super low to stimulate borrowing and investment. Six weeks in, the results are a mixed bag.
Mortgage rates have come down. Freddie Mac reported last week that the average rate on a 30-year-mortgage was at 3.37 percent, down from 3.55 percent before the Fed’s stimulus announcement. But that drop might overstate the new measure’s success, as banks are pocketing much of the reduction in interest rates.
The stock market has been slightly down in the past month. But the Fed actions do not seem to have affected inflation or other market measures in any significant way.
The central bank has two legal mandates: maximizing employment and keeping prices stable. The Fed has an inflation target of 2 percent.
The U.S. unemployment rate has come down to 7.8 percent after the recession drove it above 8 percent for several years. But other, less volatile measures of employment suggest a very sluggish recovery. The European financial crisis has eased a bit, but there is a worrisome slowdown in China and other emerging markets.
The housing market has shown signs of a modest recovery, but there is a looming end-of-year “fiscal cliff” of sharp spending cuts and tax increases that are likely to push the economy into recession if Congress does not take action to stop it.
Many forecasters expect substandard economic growth and little progress in bringing down joblessness over the next year, suggesting the Fed will have to follow through on its decision to continue the stimulus program.
Analysts are likely to pay much more attention to the Fed meeting Dec. 11 and 12, when the central bank will need to decide whether to continue its purchases of mortgage bonds into the new year. It will also consider whether to continue to purchase long-term Treasury bonds, which it has been doing at a pace of $45 billion per month since June.
In December, the Fed could also announce more specific conditions for when it would change policy. The issue of more clarity on future Fed decisions has been the subject of much debate within the central bank and among outside economists.
The Fed says it will hold interest rates ultra-low through mid-2015, but some outside economists say the Fed should offer the public more detailed guidance. Federal Reserve Bank of Chicago President Charles Evans, for example, has suggested that officials announce that the Fed will hold interest rates down until the unemployment rate reaches 7 percent or inflation reaches 3 percent.
Although many at the Fed favor Evans’s proposal, there is wide disagreement about what conditions to set for continuing or pulling out of policy actions.
All Fed members voted in favor of Wednesday’s action except Richmond Fed President Jeffrey Lacker, who has long opposed the central bank’s stimulus campaign.