Forecasting a Speedup in Growth, the Fed Again Cuts Bond Purchases

Posted by Unknown on Wednesday, April 30, 2014

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WASHINGTON — The Federal Reserve continued to retreat from its stimulus campaign on Wednesday, saying it was looking past the economic slowdown during an unusually cold winter because the pace of growth already was rebounding.


As expected, the Fed announced after a two-day meeting of its policy-making committee that it would pare its purchases of Treasury and mortgage-backed securities by $10 billion, to $45 billion a month beginning in May.


“Growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions,” the Federal Open Market Committee said in its policy statement. The decision was unanimous.


The statement, which affirmed the Fed’s intent to stop buying bonds later this year, offered no new insight into the next set of decisions the Fed must make: when to start raising short-term interest rates, which it has held near zero since December 2008.


There was, however, one hint that the Fed’s deliberations were more interesting than its statement. The Fed said on Wednesday that its board had held an unscheduled meeting Tuesday morning to discuss “medium-term monetary policy issues.”


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The statement Wednesday from the Federal Open Market Committee, the policy-making group of the Federal Reserve, offers its assessment of current economic conditions.




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The Fed’s chairwoman, Janet L. Yellen, said in a recent speech that the Fed was focused on three issues: the extent of slack in the labor market, the sluggish pace of inflation and the remaining risks to the economic recovery.


The Fed has largely discounted the economy’s slow growth during the winter months in charting its retreat. The government said on Wednesday that the economy grew just 0.1 percent during the first three months of the year. Officials have concluded that the slowdown was largely a result of unusually cold weather, and they have pointed to signs that growth already is rebounding.


The Fed has reduced its monthly bond purchases by $10 billion at each meeting since December, reducing the volume of purchases to $55 billion in April from $85 billion each month last year. It is on pace to end the purchases with a single cut of $15 billion in October, or a final cut of $5 billion in December.


The Fed has been less clear about what happens next. Indeed, officials decided in March to preserve some ambiguity about the timing of a first increase in interest rates, substituting a vague description of economic goals in place of a commitment to wait at least as long as unemployment was above 6.5 percent.


“Tying the response of policy to the economy necessarily makes the future course of the federal funds rate uncertain,” the Fed’s chairwoman, Janet L. Yellen, said in a recent speech. “But by responding to changing circumstances, policy can be most effective at reducing uncertainty about the course of inflation and employment.”


Officials have expressed satisfaction with the continued decline of unemployment, while acknowledging that it most likely overstates the health of the labor market. The government counts people as unemployed only if they are actively looking for work, and many people without jobs have stopped looking for new ones.


Unemployment stood at 6.7 in March. The April number will be published Friday.


In the weeks before this meeting, Fed officials instead emphasized their concern about the slow pace of inflation. The Fed’s preferred measure increased just 1.1 percent over the 12 months that ended in February, well below the 2 percent pace the Fed regards as healthy. Preliminary data for March will be published Thursday.


Most Fed officials forecast that its current policies are sufficient to raise inflation toward that 2 percent pace by 2016. But inflation has consistently lagged the Fed’s expectations in recent years, and some officials see reason for doubt.


“I see little evidence in the current data suggesting that we are yet on this modest path to achieving the targeted 2 percent inflation rate,” Eric S. Rosengren, president of the Federal Reserve Bank of Boston, said in an April speech.


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