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Federal Reserve suggests it’s closer to slowing bond purchases
First Published Jun 19 2013 12:10 pm • Last Updated Jun 19 2013 02:03 pm

WASHINGTON • Chairman Ben Bernanke ended weeks of speculation Wednesday by saying the Federal Reserve will likely slow its bond-buying program later this year and end it next year if the economy continues to improve.

The Fed’s bond purchases have helped keep long-term interest rates at record lows.

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Bernanke said the reductions would occur in "measured steps" and that the purchases could end by the middle of next year. By then, he said he thought unemployment would be around 7 percent.

Bernanke likened any reduction in the Fed’s $85 billion-a month in bond purchases to a driver letting up on a gas pedal rather than applying the brakes.

Anticipating higher interest rates, investors reacted by selling both stocks and bonds. The Dow Jones industrial average was down 167 points in late-afternoon trading after Bernanke’s news conference ended. The yield on the 10-year Treasury note shot up to 2.31 percent from 2.21 percent just before the statement came out.

The Fed sketched a brighter economic outlook Wednesday, which is why it thinks record-low interest rates may soon no longer be necessary. Low rates help fuel economic growth. But they also raise the risk of high inflation and dangerous bubbles in assets like stocks or real estate.

Speaking of the economy, Bernanke said, "The fundamentals look a little better to us."

He spoke at a news conference after the Fed ended a two-day policy meeting. After the meeting, the Fed voted to continue the pace of its bond-buying program for now. But it offered a more optimistic outlook for the U.S. economy and job market.

In its statement, the Fed said the economy is growing moderately. And for the first time it said the "downside risks to the outlook" had diminished since fall.

Timothy Duy, a University of Oregon economist who tracks the Fed, called the statement "an open door for scaling back asset purchases as early as September."


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The fact that the Fed foresees less downside risk to the job market "gives them a reason to pull back" on its bond purchases, Duy said.

The Fed said it will keep buying $85 billion a month in bonds until the outlook for the job market improves substantially. The goal is to lower long-term interest rates to encourage borrowing, spending and investing. It hasn’t defined substantially.

Asked if it will be difficult for the Fed to clearly communicate its plans for scaling back the bond purchases, Bernanke agreed.

"We are in a more complex type of situation," he said. "We are going to be as clear as we can."

In its statement Wednesday, the Fed said it would maintain its plan to keep short-term rates at record lows at least until unemployment reaches 6.5 percent.

The Fed also released its latest economic projections Wednesday. Fed officials predicted that unemployment will fall a little faster this year, to 7.2 percent or 7.3 percent at the end of 2013 from 7.6 percent now. They think the rate will be between 6.5 percent and 6.8 percent by the end of 2014, better than its previous projection of 6.7 percent to 7 percent.

The Fed also said inflation was running below its 2 percent long-run objective, but noted that temporary factors were partly the reason. It said inflation could run as low as 0.8 percent this year. But it predicts it will pick up next year to between 1.4 percent and 2 percent.

"The more upbeat tone and the change in the unemployment forecast will only encourage expectations for action soon," Jim O’Sullivan, chief U.S. economist at High Frequency Economics, wrote in a research note. "We continue to believe that tapering could start at the Sept. 17-18 meeting."

But David Robin, co-head of the futures and options desk at the brokerage Newedge, said he didn’t think Bernanke’s upbeat assessment matches an economy that’s just "muddling along."

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Text of the Federal Reserve’s statement Wednesday

Here is the statement the Federal Reserve released Wednesday after its two-day policy meeting:

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.



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