Federal Reserve ponders possibility of increasing stimulus

May 1, 2013

The Federal Reserve on Wednesday broached the possibility of increasing its massive stimulus program if the economy weakens, suggesting it remains uncertain about the fate of the recovery.

The Fed has been purchasing $85 billion in bonds a month in an effort to keep long-term interest rates low and stoke demand. The program is tied to improvement in the labor market, and officials had begun talking about tapering it off after several strong months of job growth this year.

But after its two-day policy-setting meeting wrapped up Wednesday, the central bank explicitly stated for the first time that it could increase, as well as reduce, bond purchases “as the outlook for the labor market or inflation changes.”

The Fed kept its benchmark interest rate unchanged near zero. It has pledged not to raise rates at least until unemployment falls below 6.5 percent or inflation hits 2.5 percent.

“With appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline,” officials said in a statement.

Just a few months ago, some Fed officials started floating the idea of scaling back the bond purchases. San Francisco Fed President John Williams expressed hope that momentum in the recovery would allow the central bank to taper purchases this summer and end the program this year.

But leading up to the Fed’s meeting this week, economic data took a turn for the worse. Hiring slowed dramatically in March to just 88,000 jobs — well below the 200,000 a month needed to significantly lower the unemployment rate. Though the economy expanded at an annual rate of 2.5 percent during the first quarter, federal spending cuts resulted in a slower pace than many analysts had expected. Just hours before Fed officials ended their meeting, new data on manufacturing showed the industry grew more slowly in April.

The next major economic signpost will be revealed Friday, when the Labor Department releases its monthly employment report. Analysts expect it will show that the economy created 145,000 jobs in April.

But a widely watched private estimate of hiring clocked in much lower Wednesday. The ADP Employment Report calculated only 119,000 new jobs in April. Mark Zandi, chief economist at Moody’s Analytics, which compiled the data, said the economy seemed to be “throttling back” to weaker job growth.

“This is a bit disappointing,” Zandi said. “It probably forestalls any increase in unemployment, but it’s certainly not enough to generate any declines in unemployment.”

The Fed kept its assessment of the economy virtually unchanged in a carefully worded policy statement Wednesday. It described the recovery as proceeding at a “moderate pace” and noted the strength in the housing market — which has been fueled in part by central-bank stimulus.

Its reading of the job market was slightly more downbeat, citing “some improvement in recent months, on balance.” And as the federal government’s across-the-board spending cuts known as the sequester kick in, the central bank also put part of the blame for weaker output squarely on Washington.

“Fiscal policy is restraining economic growth,” it said.

One member of the Fed’s policymaking committee dissented from its decision to hold steady on interest rates and stimulus. Kansas City Fed President Esther George cited concerns that the easy-money philosophy could create future instability and boost inflation expectations.

But other members are worried that inflation is too low. The Fed’s target for price growth is 2 percent per year, but inflation has clocked in significantly below that. Last month, St. Louis Fed President James Bullard said that he would be open to increasing bond purchases if prices fell further. Though he has been critical of the central bank’s focus on unemployment, he said low inflation should warrant attention from the Fed.

“We should defend our inflation target from the low side,” he said at the time.

The Fed has not given specific criteria for reducing its rate of purchases, though some officials have developed their own guidelines. It is even more unclear what conditions would prompt an increase in bond purchases.

One thing is certain, however: The Fed is waiting for more information before making a call.

“They made it clear that how much they purchase depends on the data,” said Beth Ann Bovino, deputy chief economist at Standard & Poor’s Ratings Services. “They’re going to watch the jobs number. Let’s see what happens on Friday.”

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