Federal Reserve

Fed keeps door open to more Q.E. stimulus

Central bank to maintain loose policy until job market lifts but could ramp up - or wind down - bond buying if necessary

PUBLISHED : Thursday, 02 May, 2013, 2:30pm
UPDATED : Monday, 30 May, 2016, 2:05pm

The Federal Reserve kept its easy-money policies but left the door open to step up bond purchases if the economy slowed under the government's severe "sequester" spending cuts.

The central bank's policy board, the Federal Open Market Committee, said on Wednesday after a two-day meeting that the economy continued to grow at a "moderate" pace. But it also said that growth was restrained by the government's tighter fiscal policy, which imposed tax rises in January and across-the-board spending cuts in March.

The Fed suggested, in a change from previous statements, that it would keep open the option of more stimulus - larger bond purchases - if the economy slows.

As widely expected, the committee held its key interest rate at zero to 0.25 per cent.

And the Fed policymakers also stuck to their US$85 billion a month bond-buying programme, known as quantitative easing (QE), to keep downward pressure on longer-term interest rates, support mortgage markets and ease credit.

The committee again said that it would maintain its ultra-loose policy until the outlook for the job market improved "substantially" in a context of price stability. With the unemployment rate at 7.6 per cent amid lacklustre 2.5 per cent growth, it was unlikely the jobless rate would fall below the central bank's 6.5 per cent threshold for considering tapering off its stimulus any time soon.

Paul Edelstein of IHS Global Insight said the committee's statement reinforced the idea that QE would last beyond this year "since unemployment isn't expected to improve much this year and inflation is so low".

The committee, led by Fed chairman Ben Bernanke, said it continued to see downside risks to the economic outlook. It said it would step up or rein in the bond purchases if conditions warranted. "The committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labour market or inflation changes," it said.

Earlier this year, as some policymakers warned of inflation concerns, the Fed and analysts were more focused on the option of winding down QE.

But this week's meeting came after a series of economic data showing weakening momentum and falling inflation.

The Fed's preferred inflation indicator rose just 1.1 per cent in March from a year ago.

The Fed policymakers repeated that inflation was not a significant concern, saying it was running "somewhat below" the committee's 2 per cent objective and they expected it to stay at or below that level over the medium term. "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 2.0 per cent," it said.

Ryan Sweet, of Moody's Analytics, said the discussion of adjusting the Fed's asset purchases appeared to have been better balanced than at its March meeting "as a lack of inflation has some Fed officials beginning to stir".