Fed cuts bond purchases by another $10b

Chairwoman Janet Yellen says the jobless rate overstates the health of the economy.
Larry Downing/Reuters
Chairwoman Janet Yellen says the jobless rate overstates the health of the economy.

WASHINGTON — The Federal Reserve further curtailed its economic stimulus campaign Wednesday, announcing as expected that it would reduce its monthly bond purchases because of the progress of the economic recovery.

The Fed also emphasized, however, that it expected to continue the centerpiece of its stimulus campaign, the suppression of short-term interest rates. Its policy-making committee said in a statement released after a two-day meeting that rates would remain at the current level, near zero, “for a considerable time” after it stops adding to its bond holdings, particularly if inflation remains sluggish.

The loose guidance about short-term rates replaced the Fed’s specific assertion, made in December 2012, that it would keep rates near zero at least as long as the official unemployment rate remained above 6.5 percent.


Officials emphasized the new language was intended to preserve rather than change the likely timing of the first rate increase, because unemployment has fallen more quickly than expected and other economic indicators, including inflation, remain weak.

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Janet L. Yellen, the Fed’s new chairwoman, said at a news conference after the statement’s publication that the Fed would not be overly influenced by the unemployment rate, which Yellen believes overstates the health of the economy.

“The purpose of this change is simply to provide more information than we have in the past, even though it is qualitative information, as the unemployment rate declines below 6.5 percent,” Yellen said.

Yellen responded to a separate question by defining “a considerable time” as “six months, that kind of thing,” suggesting a first rate increase could come in spring 2015, earlier than market expectations.

In a separate set of forecasts, also published Wednesday, Fed officials consolidated around the view that short-term rates would rise next year.


The steady course of Fed policy reflected the confidence of officials that the economy continues to recover from the Great Recession. The statement said that “growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions.” But it added that the Fed regarded its current efforts as sufficient to produce gradual improvement in the economy, lower unemployment, and a low pace of inflation.

Even so, Yellen noted that many Fed officials no longer expected a complete recovery. Their economic predictions reflect a growing expectation that the Fed’s benchmark interest rate will remain below its historical norm even after unemployment and inflation have returned to equilibrium.

“It’s a matter of headwinds from the crisis that have taken a very long time to dissipate and are likely to continue being operative,” she said.

Predictions that the economy would grow more quickly in 2014 have not come true. Cold weather and winter storms in some parts of the country appear to have suppressed economic activity. Car sales, for example, fell sharply in January in the coldest parts of the country, according to a recent analysis. But it is not clear whether the difficult winter is a complete explanation. Growth has repeatedly fallen short of the Fed’s expectations in recent years, and officials have said that judging the impact of the cold will take time — and warmer weather.

The labor market remains weak. The share of adults with jobs has barely increased since the recession, and many people have stopped looking for work, driving the decline in the official unemployment rate.


Inflation also remains sluggish. The Fed’s preferred measure of inflation rose just 1.1 percent during the 12 months that ended in January, well below the 2 percent annual pace the Fed has established as its target. Officials see this as a symptom of the broader economic malaise and expect inflation to increase alongside the economy. But the Fed in recent months has communicated growing concern about the trend, highlighting in policy statements that it will act if necessary to raise inflation back to a healthier pace.

Yet Fed officials remain optimistic about growth in the second half of the year.

Forecasts published Wednesday showed few changes, in comparison with the last forecasts in December. Officials expect slightly softer growth and a slightly faster decline in the official unemployment rate. The forecast now predicts growth no faster than 3 percent in 2014, compared with a December forecast of up to 3.2 percent; unemployment is predicted to fall as low as 6.1 percent, rather than 6.3 percent.

Those two trends normally move in opposite directions. But economic weakness since the Great Recession has steadily reduced the unemployment rate by leading people without jobs to stop looking for work.

Fed officials now forecast that the unemployment rate in 2016 will reach a new equilibrium between 5.2 and 5.6 percent, meaning they do not believe the rate can be further reduced without precipitating inflation. That is about a percentage point higher than the prerecession rate.

The Fed also faces concerns about the financial markets. The Fed is trying to strike a balance between encouraging risk taking and preventing the kinds of excesses that could produce a financial crisis.

Yellen and other senior Fed officials have said repeatedly that they are watching closely and see little reason for alarm.