October 24, 2012 / 6:39 PM / 8 years ago

Fed sticks to stimulus plan, says economy a bit firmer

WASHINGTON (Reuters) - The Federal Reserve on Wednesday stuck to its plan to keep stimulating U.S. growth until the job market improves even as it acknowledged some parts of the economy were looking a bit better.

A view shows the Federal Reserve building on the day it is scheduled to release minutes of the Federal Open Market Committee from August 1, 2012, in Washington August 22, 2012. REUTERS/Larry Downing

In a statement after a two-day meeting, the central bank repeated its vow to keep rates near zero until mid-2015 and its pledge to keep supporting growth while the recovery strengthens.

The Fed’s policy-setting panel made no change in its plan to purchase $40 billion in mortgage-backed debt per month to push interest rates lower and spur a stronger recovery.

“The committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions,” the Fed said.

U.S. stocks edged lower after the announcement and the dollar extended gains against the euro, while Treasury bonds showed little reaction, closing the session lower.

The central bank’s statement differed little from its announcement last month in which it launched its third round of bond-buying, or quantitative easing, known as QE3, and made clear officials still had concerns on the recovery’s strength.

Analysts said December will likely be a more eventful meeting as the Fed decides what to do when its separate Operation Twist program, in which it is buying long-term Treasury debt with proceeds from short-term securities, expires at the end of the year.

“Officials will likely make a decision then on whether QE3 will be extended to include Treasuries purchases when Operation Twist ends at year-end,” said Jim O’Sullivan, economist at High Frequency Economics. “We expect it will be.”

U.S. gross domestic product grew at an annual rate of just 1.3 percent in the second quarter. Economists expect the pace of recovery quickened a bit in the third quarter but not by enough to put steady downward pressure on the jobless rate, which fell sharply in September but remains at an elevated 7.8 percent.


The Fed noted the housing sector was continuing to gather its strength and said household spending had grown “a bit more quickly.” However, it cautioned that business investment was softening.

It also nodded to a recent increase in inflation but said it was linked to higher energy prices, adding that inflation expectations have remained stable — a sign officials think pressures will remain under wraps.

Richmond Federal Reserve Bank President Jeffrey Lacker dissented against the decision, as he has done at every meeting this year.

The central bank’s announcement came just under two weeks before the U.S. presidential election. Economists said policymakers were likely to keep their heads down and avoid drawing any political fire.

The Fed, which has held rates close to zero since December 2008, had already bought $2.3 trillion in mortgage-related and government debt before it launched its latest round of stimulus.

Some analysts and many conservative politicians have expressed concern the Fed’s policies could spark inflation, but prices increases have remained tame so far.

The problem is, growth has too. At the same time, a looming tightening of U.S. fiscal policy risks tossing the economy back into recession.

Europe’s debt crisis, a key source of concern for the Fed, also remains unresolved, although it is not flaring up too wildly in financial markets, offering comfort that the U.S. economy will escape any contagion.


Aside from their discussion over the stance of monetary policy, officials likely continued to debate fine-tuning their communications strategy by adopting numerical thresholds for economic variables that would guide the central bank’s unconventional stimulus.

However, no new announcement was made. Analysts say to look to the Fed’s next meetings in December or January for greater clarity on policymakers’ goal posts.

Chicago Federal Reserve Bank President Charles Evans has advocated keeping rates near zero until the unemployment rate, currently at 7.8 percent, goes down to 7 percent, as long as inflation does not exceed 3 percent. The central bank formally targets 2 percent inflation.

Officials are also strongly considering the adoption of a consensus economic forecast for the central bank as a whole, as opposed to the quarterly individual projections for growth, employment, inflation and interest rates currently published.

Editing by Tim Ahmann, Andrea Ricci and Kenneth Barry

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