Thursday, October 31, 2013

Fed Extends Stimulus as Growth Stumbles

WASHINGTON — The Federal Reserve is still waiting for clear evidence that the economy can grow decently without its help.

The Fed's widely expected announcement on Wednesday that it would press ahead with its stimulus campaign of asset purchases and low interest rates reflected the reality that the nation's central bankers gained little clarity in the six weeks since their last meeting, in part because the government shutdown delayed and distorted key economic indicators.

The statement, issued after a scheduled two-day meeting of its policy-making committee, amounted to a declaration that the Fed is not yet ready to decide, and it shed little light on how soon changes may come.

The Fed maintained its optimistic assessment of "growing underlying strength in the broader economy," contrasting the recovery of the private sector with the continued drag of federal spending cuts. It said that the availability of jobs was improving and that it expected inflation to rebound from its sluggish pace. Notably, it made no direct mention of the shutdown.

But despite the relatively sunny forecast, largely unchanged from the Fed's last meeting in September, Fed officials remain reluctant to pull back. As a result, the central bank will continue to add $85 billion a month to its portfolio of Treasury securities and mortgage-backed securities.

And the Fed, if anything, has reinforced its commitment to hold short-term interest rates near zero through next year and well into 2015. "Taking into account the extent of federal fiscal retrenchment over the past year, the committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy," the Federal Open Market Committee said. "However, the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."

Analysts and investors reacted to the statement as moderately increasing the chances that the Fed would begin to retreat, or taper back on its purchases, in December, when the committee holds its final scheduled meeting of the year. Stocks fell slightly. Yet most analysts said they continued to regard the Fed as more likely to wait until the spring.

"This is a somewhat hawkish statement, but we don't think it's so hawkish as to change our expectations for a first tapering in April," Michael Feroli, chief United States economist at JPMorgan Chase, wrote to clients.

Fed officials spent much of the summer preparing investors for a retreat from its stimulus campaign before the end of the year.

But there is still little sign that the Fed has succeeded in increasing job growth. The share of adults with jobs remains at roughly its post-recession nadir. The unemployment rate has fallen largely because fewer people are looking for jobs.

Some analysts saw the Fed's upbeat description of the job market as evidence of its desire to retreat, even if it is not prepared to set that in motion yet.

The description "is not true, and we know it, the data has been weakening on this front," wrote Eric Green, global head of rates research at TD Securities. "One must view the emphasis here as reason to lean against the view that the Fed has gone soft."

Mr. Green added, however, that he still did not expect the Fed to begin its retreat until March, because its desire remained constrained by the weak economic reality.

Inflation has fallen well below the 2 percent annual pace the Fed has established as its goal. Prices rose in August at an annual pace of 1.2 percent, excluding food and fuel, according to the Fed's preferred measure, the Commerce Department's index of personal consumption expenditures.

The statement said persistently low inflation "could pose risks to economic performance," but reiterated the Fed's expectation that inflation will rebound to a healthier level.

The combination of persistently high unemployment and low inflation has prompted some Fed officials, and outside critics, to question whether the asset purchases are worthwhile.

"With the benefits of quantitative easing essentially at zero, this equivocating action by the Fed is less about the economy and more about its unwillingness to begin the tapering that everyone knows must begin," Representative Kevin Brady, a Texas Republican who is chairman of the congressional Joint Economic Committee, said in a statement.
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