Fed to further trim stimulus as Bernanke term nears end

A television screen on the floor of the New York Stock Exchange on Wednesday shows the decision by the Federal Reserve to cut its monthly bond purchases by an additional $10 billion because of a strengthening U.S. economy.
A television screen on the floor of the New York Stock Exchange on Wednesday shows the decision by the Federal Reserve to cut its monthly bond purchases by an additional $10 billion because of a strengthening U.S. economy.

The Federal Reserve will trim its monthly bond buying by $10 billion to $65 billion, sticking to its plan for a gradual withdrawal from departing Chairman Ben Bernanke’s unprecedented easing policy.

“Labor market indicators were mixed but on balance showed further improvement,” the Federal Open Market Committee said Wednesday in a statement after a two-day meeting in Washington that was the last for Bernanke, who will be succeeded by Vice Chairman Janet Yellen on Saturday. “The unemployment rate declined but remains elevated.”

Policymakers pressed on with a reduction in the purchases intended to speed a recovery from the worst recession since the Great Depression, even after payroll growth slowed in December and amid a rout in emerging-market currencies. Some officials have expressed concern that the Fed’s record $4.1 trillion balance sheet could help create asset price bubbles.

The Fed left unchanged its statement that it will probably hold its target interest rate near zero “well past the time” that unemployment falls below 6.5 percent, “especially if projected inflation” remains below the committee’s longer-run goal of 2 percent.

“The Fed is staying the course,” said Guy Berger, an economist at RBS Securities Inc. in Stamford, Conn. “The hurdle for backing away from the implicit stair-step taper that they’ve suggested, which we view as roughly $10 billion per month, and winding down the program in September, is pretty high.”

The Fed repeated that inflation “persistently below its 2 percent objective could pose risks to economic performance and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.”

The central bank’s preferred gauge of consumer prices climbed 0.9 percent in the year through November and hasn’t exceeded the Fed’s goal since March 2012.

Bond purchases will be divided between $35 billion in Treasuries and $30 billion in mortgage debt beginning in February, the Fed said. It repeated that purchases are not “on a preset course.”

It was the first meeting with no dissent since June 2011, showing Fed officials coalescing around the central bank’s tapering strategy as Yellen prepares to take over the chairmanship from Bernanke.

Fed district bank presidents rotate voting on monetary policy each year, with Cleveland’s Sandra Pianalto, Philadelphia’s Charles Plosser, Richard Fisher of Dallas and Narayana Kocherlakota of Minneapolis voting in 2014. Fed governors hold permanent votes, as does the president of the Federal Reserve Bank of New York, who serves as Federal Open Market Committee vice chairman.

Even as they maintain the stimulus, central bankers are planning for the end to the era of low interest rates. In a technical note Wednesday, the Fed said it would continue testing a program designed to prevent short-term market interest rates from falling too low. The program, called an overnight reverse repurchase facility, was first approved in September.

Economists surveyed by Bloomberg forecast the Fed would taper purchases by $10 billion. The Fed will continue tapering at each meeting and end the program no later than December, according to the Jan. 10 survey.

“Once you set out on a course, it’s costly to deviate from that course,” said Benjamin Mandel, an economist at Citigroup Inc. in New York who formerly worked at the New York Fed. “It’s costly in terms of credibility and predictability.”

The Fed on Dec. 18 announced its first reduction in bond purchases, by $10 billion, and Bernanke outlined the strategy for tapering at a news conference, the last of his eight-year tenure.

“If we’re making progress in terms of inflation and continued job gains, then I imagine we’ll continue to do probably at each meeting a measured reduction,” he said.

Since then, a Labor Department report showed payrolls in December rose at the slowest pace in almost three years, partly reflecting the effects of winter weather. The unemployment rate declined to 6.7 percent, a five-year low, as people left the labor force.

Business, Pages 25 on 01/30/2014

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