Fed to Maintain Stimulus Amid Budget Cuts
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The Federal Reserve on Wednesday said it would keep its stimulus policies in place until it is convinced that recent gains and improvements in the economy can be sustained organically without assistance from policymakers.
In a statement after a two-day meeting, the Fed said it would leave the pace of asset purchases unchanged at $85 billion a month, until it sees signs of a long-term improvement in unemployment levels.
The Federal Reserve on Wednesday said it would keep its stimulus policies in place until it is convinced that recent gains and improvements in the economy can be sustained organically without assistance from policymakers.
In a statement after a two-day meeting, the Fed said it would leave the pace of asset purchases unchanged at $85 billion a month, until it sees signs of a long-term improvement in unemployment levels.
Acknowledging that there have been improvements in overall unemployment rates, Federal Reserve Chairman Ben Bernanke said yesterday that the gains so far have been “partial” and “modest”.
“Obviously, there has been improvement,” he told at a news conference in Washington. “One thing we would need is to make sure that this is not a temporary improvement.”
Since 2008, the Fed has purchased more than $2.5 trillion in bonds aimed at driving down long-term interest rates and to encourage higher consumption, investment and hiring.
The programme, also known as quantitative easing, appears to be paying off, with a rash of recent data showing the economy gathering strength. Retail sales have been stronger than expected, manufacturing output has picked up and employment growth has quickened, with the jobless rate dropping to 7.7 percent last month from 7.9 percent in January.
But Bernanke noted that the job market has shown signs of strong gains before, only to falter. “I think an important criterion would be not just the improvement that we’ve seen, but is it going to be sustained for a number of months?” he said.
According to Bernanke, the pace of asset purchases may be altered if the economy continues to heal.
“As we make progress toward our objective, we may adjust the flow rate of purchases from month to month to appropriately calibrate the amount of accommodation,” he said. “We think it makes more sense to have our policy variable, which is the rate of flow of purchases respond in a more continuous or sensitive way to changes in the outlook.”
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Despite the better recovery outlook, the Fed said it still saw risks for the economy.
The committee “remains concerned that restrictive fiscal policies may slow economic growth and job creation in coming months,” said Bernanke, referring to the “sequester” budget cuts that began on March 1.
Bernanke meanwhile said the U.S. economy and financial sector were not currently at danger from the crisis in Cyprus, which has sent shivers through the European economy. “At this point we are not seeing a major risk to the U.S. financial system or the U.S. economy,” he said.
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