Fed keeps rate at record low, ends bond buying
Washington — The Federal Reserve plans to keep a key interest rate at a record low to support a U.S. job market that’s improving but still isn’t fully healthy and to help boost unusually low inflation. As expected, it’s also ending a bond purchase program that was intended to keep long-term rates low.
The Fed on Wednesday reiterated its plan to maintain its benchmark short-term rate near zero “for a considerable time.” Most economists predict the Fed won’t raise that rate before mid-2015. The Fed’s benchmark rate affects rates on many consumer and business loans.
In a statement ending a policy meeting, the Fed suggested that the job market, though still not back to normal, is strengthening. The statement drops a previous reference to “significant” in referring to an “underutilization” of available workers.
Instead, the Fed said the excess of would-be job holders is “gradually diminishing.” It also noted solid job gains and a lower unemployment rate, now 5.9 percent. One of the Fed’s major goals is to achieve maximum employment, which it defines as an unemployment rate between 5.2 percent and 5.5 percent.
The Fed repeated previous language that the likelihood of inflation running persistently below its 2 percent target rate has diminished, even though inflation is being held down by a drop in energy prices and other factors.
Investors responded to confirmation that the Fed would end its bond-buying program by positioning themselves for higher rates. The dollar rose against other currencies, bond yields rose and the price of gold fell.
The Fed’s statement was approved 9-1. The one dissent came from Narayana Kocherlakota, president of the Fed’s regional bank in Minneapolis. He contended that the Fed should have signaled its intention to maintain a record-low benchmark rate until the inflation outlook has reached the central bank’s 2 percent target. And he argued that the Fed should have continued its bond purchases at the current pace.
Kocherlakota is considered one of the Fed’s “doves” — officials who are more concerned about unemployment than are “hawks,” who worry more about the risk of high inflation. At the September meeting, two “hawks” — Presidents Charles Plosser of the Philadelphia Fed and Richard Fisher of the Dallas Fed — had dissented. On Wednesday, they voted for the statement.
The U.S. economy has been benefiting from solid consumer and business spending, manufacturing growth and a surge in hiring that’s reduced the unemployment rate to a six-year low. Still, the housing industry is still struggling, and global weakness poses a potential threat to U.S. growth.
Fed Chair Janet Yellen has stressed that while the unemployment rate is close to a historically normal level, other gauges of the job market remain a concern. These include stagnant pay; many part-time workers who can’t find full-time jobs; and a historically high number of people who have given up looking for a job and are no longer counted as unemployed.
What’s more, inflation remains so low it isn’t even reaching the Fed’s long-term target. When inflation is excessively low, people sometimes delay purchases — a trend that slows consumer spending, the economy’s main fuel. The low short-term rates the Fed has engineered are intended, in part, to lift inflation.
The Fed’s decision to end its third round of bond buying had been expected. It has gradually pared the purchases from $85 billion in Treasury and mortgage bonds each month to $15 billion. And the Fed had said it would likely end the program after its October meeting if the economy continued to improve.
Even with the end of new purchases, the Fed’s investment holdings stand at $4.5 trillion — more than $3 trillion higher than when the bond purchases were launched in 2008 at the height of the financial crisis. The Fed has said it won’t begin selling its holdings until after it starts raising short-term rates.
Though most economists have predicted that the Fed’s first rate hike won’t occur until summer, some foresee no increase until fall. That’s in part because of fears that the global economy is weakening and could threaten the U.S. economy.
The bond buying program the Fed is now ending was intended to lower long-term borrowing rates to encourage spending and spur economic growth. The Fed began the purchases after it had cut its main policy tool, the federal funds rate, as low as it could go. The Fed’s benchmark short-term rate has been at zero since December 2008.
Supporters have said the bond buying helped invigorate the economy and reduce the unemployment rate, which peaked at 10 percent during 2009.
But critics contend that the Fed will find it hard to sell its massive holdings without jolting financial markets. They also worry that all the money it has pumped into the economy will eventually ignite inflation and cause dangerous bubbles in assets like stocks or housing.