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Federal Reserve in no rush to halt bond buying

Officials want to see more good news; inflation concerns remain a key factor

Fed chairman Ben S. Bernanke with vice chairwoman Janet L. Yellen, who is expected to be confirmed by the US Senate to succeed him this month.
Fed chairman Ben S. Bernanke with vice chairwoman Janet L. Yellen, who is expected to be confirmed by the US Senate to succeed him this month.Chip Somodevilla/Getty Images

WASHINGTON — Federal Reserve officials are in no hurry to retreat from their bond-buying campaign to stimulate the economy and are likely to postpone any cuts to the program until next year, according to public statements by Fed officials and interviews with some of them.

Job growth has strengthened in recent months, and Fed officials expect continued improvement in the coming year. Fed chairman Ben S. Bernanke predicted in June that the central bank would taper its purchases by the end of this year, and officials say they still could announce such a cut next week, when the Fed's policy-making committee is scheduled to hold its final meeting of the year.


But influential Fed officials see little harm in postponing the decision, particularly compared with the risks of pulling back too soon. Significant details of the eventual retreat also remain the subjects of unresolved debates, according to the public statements and interviews. And some officials argue that the slow pace of inflation is itself a reason for the Fed to maintain its stimulus campaign.

"Everything else equal, I would like to see a couple of months of good numbers," Charles L. Evans, president of the Federal Reserve Bank of Chicago, told Reuters on Friday, referring to the relatively strong jobs numbers in November.

Evans added that he was "certainly nervous" about the sluggish pace of inflation. Rising prices can help stimulate the economy, making it easier for companies to increase profits and for borrowers to repay debts. Inflation also encourages people and businesses to borrow more money and to spend it more quickly.

Low inflation reduces those incentives. It also means the economy is closer to deflation, or a general decline in prices, which has the opposite effect: freezing economic activity by discouraging both borrowing and spending.

Since January, the Fed has added $85 billion a month to its holdings of Treasury and mortgage-backed securities as part of a broader effort to reduce borrowing costs for businesses and consumers and encourage risk-taking by investors.


Bernanke and his allies have repeatedly described the program as a safe and effective way to generate a little more economic activity at a time when the nation's primary economic problem is that millions of Americans cannot find jobs.

Almost from the outset, however, internal and external critics have questioned whether the bond purchases are helping the broader economy or merely enriching investors. And they have warned that the Fed's outsize role in financial markets is disrupting normal activity and may be encouraging excessive speculation.

In the face of those doubts, the Fed has appeared to play for time, repeatedly indicating that it is getting ready to pull back even as a strong majority of its policy-making committee has voted to extend the campaign at each meeting this year.

William C. Dudley, president of the Federal Reserve Bank of New York and a key supporter of the bond purchase program, reflected the caution of this majority in a November speech in which he said, "I have to admit that I am getting more hopeful" given the recent improvement in economic data.

"I hope that this marks a turning point for the economy," Dudley said. But he continued, "We have seen such bursts in payroll growth before over the past few years and have been disappointed when the pickups proved temporary."


Officials including Dudley and Janet L. Yellen, the Fed's vice chairwoman — whom the Senate is likely to confirm as Bernanke's successor this month — see recent job growth as outstripping the moderate pace of economic growth.

"The Yellen/Dudley prescription holds that it will take strong GDP growth to convince them that these employment gains will continue," wrote Vincent Reinhart, a former head of the Fed's monetary policy staff and now the chief US economist at Morgan Stanley. "We think the committee will use the December meeting to agree on a plan" most likely to be put into effect in March.

Agreeing on a plan will also take some work. The Fed wants to convince investors that tapering would not alter what it views as the centerpiece of its economic stimulus campaign, its commitment to hold short-term interest rates near zero. It has said it will keep rates near zero at least as long as the unemployment rate remains above 6.5 percent, and probably quite a bit longer. The rate in November was 7 percent.

When Bernanke first described the Fed's tapering plans in June, investors ignored this distinction, driving up rates across the board. But the message has gradually taken hold.