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Fed sees moderate growth; no action on interest rates
Question of the Day
The Federal Reserve said Wednesday that the economy is growing moderately while cautioning that risks from Europe remain. It’s holding off on taking any further steps to boost the recovery.
In a statement after a two-day meeting, the U.S. central bank said that economic growth should “pick up gradually” - a somewhat brighter view than it offered last time. It said the job market has strengthened slightly but that unemployment remains elevated. And it pointed to an uptick in inflation but said it should be only temporary.
The Fed stuck with its plan to keep a key short-term interest rate near zero through at least late 2014. It announced no new plans for further bond buying after a current program ends in June.
“Those tools remain very much on the table and we will not hesitate to use them should the economy require additional support,” Mr. Bernanke said.
The Fed has pursued two rounds of purchases of Treasury bonds and mortgage-backed securities to try to push down long-term interest rates. The goal has been to encourage borrowing and spending.
Its decision to leave its policy unchanged had been widely expected, and reaction in financial markets was muted. The yield on the 10-year Treasury note edged higher, and the dollar rose slightly against other currencies. Stock indexes didn’t move much.
David Jones, chief economist at DMJ Advisors, said he thinks the Fed will keep another round of bond buying as an option through the rest of this year. But with the economy slowly improving, Mr. Jones said, the Fed is unlikely to implement such a program this year.
Critics have expressed concerns that the central bank has raised the risk of higher inflation with its campaign to push rates down as long as it has.
In a recent opinion piece in Fortune magazine, Sheila Bair, former chairman of the Federal Deposit Insurance Corp., argued that the central bank might be creating a bond market bubble similar to the inflation housing bubble.
The “Fed should declare victory and not intervene” by making further purchases of bonds, Ms. Bair said.
At the same time, Mr. Bernanke sought to show that he is mindful of the risks of high inflation. He said the Fed would shape its policy to keep inflation no higher than its target of 2 percent over the long term.
The Fed’s decision to keep its current easy credit stance was approved on a 9-1 vote of the central bank’s key policy panel, the Federal Open Market Committee, composed of Fed board members in Washington and five regional bank presidents.
As he has at the past two meetings, Jeffrey Lacker, president of the Richmond Federal Reserve Bank, opposed the late-2014 target date. The statement said Mr. Lacker didn’t think economic conditions warrant a record low rate late for that long.
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