The Federal Reserve announced Wednesday that it would maintain its monthly bond purchases and keep interest rates low.
The central bank signaled that the economy was improving, but not fast enough for its stimulus program to be downsized without harming growth.
The announcement was widely anticipated as a possible turning point in the Fed’s open-ended commitment to purchasing $85 billion in U.S. government bonds each month. Federal Reserve Chairman Ben Bernanke said at a May 22 congressional hearing that the Fed could begin reducing or “tapering” its bond-buying program in the “next few meetings,” setting expectations that the central bank could announce a move to scaling back its purchases at Wednesday’s meeting. Wednesday’s statement dispels those concerns.
The early market reaction to the announcement was muted. Coming into Wednesday’s meeting, a number of indicators suggested that the markets expected a slowing in stimulus from the Fed. The Dow Jones Industrial Average and S&P 500 both had fallen significantly after Bernanke’s hints at tapering in May. The Labor Department’s reading of inflation on Tuesday showed that consumer prices had edged up just 0.1 percent in May, after falling the previous two months. Yearly core personal consumption expenditure inflation – the inflation measure the Fed looks at most closely – was at its lowest ever recorded in June, and inflation expectations have been falling.
The Fed began its program of buying $85 billion in U.S. Treasuries and government agency mortgage-backed securities in September 2012. In its December meeting, the Federal Open Market Committee tasked with setting monetary policy added a commitment to leave short-term interest rates near zero until unemployment dipped below 6.5 percent.
Bernanke was due to hold a press conference following Wednesday’s announcement. The Fed is thought to prefer meetings followed by scheduled press events for the chairman to announce major policy changes. The next such event will be in December, with a statement also scheduled for late October.
Two of the voting members of the Open Market Committee dissented from the decision to continue the bond purchases. St. Louis Fed President James Bullard dissented on the grounds that the Fed should “signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings.” Esther George, the president of the Kansas City Fed, disagreed on hawkish grounds, worrying that the Fed’s bond buys could increase long-term inflation expectations.
The entire Fed statement is below:
Release Date: June 19, 2013
For immediate release
Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was James Bullard, who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings, and Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.