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Fed: Near-zero interest to stay amid halt to bond buying

Published April 25, 2012 11:53 am

Economy • Key panel sees slight uptick in growth, tame inflation.
This is an archived article that was published on sltrib.com in 2012, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

Washington • The Federal Reserve says 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 Fed said Wednesday 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 a pickup 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 an existing program ends in June.

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.

"If markets were looking for any hints of further monetary (easing), this communication will be a disappointment," said Chris Jones, economist with TD Economics.

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, 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.

The Fed's stay-the-course decision 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 Fed, opposed the late-2014 target date. The statement said Lacker didn't think economic conditions warrant a record low rate late for that long.

Fed Chairman Ben Bernanke met with reporters later Wednesday, marking a year since he began holding quarterly news conferences as a way to provide more openness about the Fed's decision-making process.

After their policy meeting in January, Bernanke and his colleagues had hinted that they were edging closer to a third round of bond buying. But since then, signs have suggested that the U.S. economy has strengthened.

The Fed first set its late 2014 target at the January meeting. That target date represented a move from last August when it announced a mid-2013 target for the first Fed rate move.

The Fed's benchmark funds rate has been kept near zero since December 2008. That means consumer and business loans tied to that rate have also remained at super-low levels. The lower those loan rates, the more likely people and companies are to borrow and spend and invigorate the economy.

After its bond-buying programs expired, the Fed in September began a $400 billion program dubbed Operation Twist. Under this program, the Fed is not expanding its portfolio but instead selling shorter-term securities it owns and buying longer-term bonds to keep their rates down. That program is scheduled to end in June.

At his previous quarterly news conference in January, Bernanke said a third round of bond buying, known as quantitative easing, was an option that was "certainly on the table."

But more recently, Bernanke and other Fed officials have sounded less inclined to pursue further bond purchases. Private economists expect the Fed to keep more bond buying as at least an option. They have pointed to the cloudy state of the economy in light of Europe's debt crisis, a potential new spike in oil prices and still-high unemployment.

On Friday, the government will issue its first estimate of economic growth for the January-March quarter. Many economists are predicting an annual growth rate of 2.5 percent — better than they had expected when the year began.

But analysts are concerned that growth could weaken in the current quarter, reflecting payback from an unusually warm winter that boosted economic activity in the first quarter.