Fed stands pat but says will act if needed

WASHINGTON Wed Apr 25, 2012 7:17pm EDT

U.S. Federal Reserve Chairman Ben Bernanke attends the International Monetary and Financial Committee (IMFC) meeting during the spring IMF-World Bank meetings in Washington April 21, 2012. REUTERS/Yuri Gripas

U.S. Federal Reserve Chairman Ben Bernanke attends the International Monetary and Financial Committee (IMFC) meeting during the spring IMF-World Bank meetings in Washington April 21, 2012.

Credit: Reuters/Yuri Gripas

Related Topics

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke on Wednesday said U.S. monetary policy was "more or less in the right place" even though the central bank would not hesitate to launch another round of bond purchases if the economy were to weaken.

In a statement after a two-day meeting, the Fed's policy-setting panel reiterated its expectation that interest rates would not rise until late 2014 at the earliest, and it took no action on monetary policy.

The Fed also adjusted its economic forecasts to acknowledge an improving labor market and slightly higher inflation over the next few years. The revised forecast, along with a change of heart by the most dovish Fed officials on the timing of the first rate rise, suggested the central bank has grown somewhat less inclined to take more action to help the economic recovery.

"We remain entirely prepared to take additional balance sheet actions as necessary to achieve our objectives," Bernanke told reporters. "Those tools remained very much on the table and we would not hesitate to use them should the economy require that additional support."

But he added: "For the time being, it appears that we are more or less in the right place.

In response to the deepest recession in generations, the Fed cut overnight rates to near zero in December 2008 and more than tripled its balance sheet by purchasing $2.3 trillion in government and mortgage bonds in two rounds of so-called quantitative easing.

Bernanke said the central bank could be spurred into doing more if the U.S. unemployment rate, which stood at 8.2 percent last month, failed to keep moving lower.

Fresh projections released by the central bank showed the most dovish officials no longer want to put off a rate increase until 2016. The Fed said seven officials believe it would be appropriate to raise borrowing costs in 2014, up from five officials in January, while only four wanted to wait longer, down from six.

Interest-rate futures showed traders now betting the first rate hike would come in March 2014, a month sooner than earlier thought.

"It looks like the more positive data over the past few months has affected the people at the more dovish end of the spectrum," said Sean Incremona, an economist at 4Cast in New York.

Colin Lundgren, head of fixed income at Columbia Management in Minneapolis, said: "I wouldn't call it hawkish. It's more that they are less dovish."

A poll of 12 big Wall Street bond dealers put chances of a further easing of monetary policy at just 28 percent. Separately, economists at Nomura, which had previously expected the Fed to buy more bonds, said they now anticipated no action.

Prices for long-term U.S. government debt ended slightly lower as investors pulled back bets on further bond buying. Stocks closed higher as a near doubling of profits at Apple fueled optimism.

Richmond Fed President Jeffrey Lacker, who is known for his hawkish stance on inflation, dissented against the central bank's policy decision, saying he believed rates would need to rise sooner than late 2014. He has now dissented at all three of the policy meetings the Fed has held this year.

INFLATION SPIKE SEEN TEMPORARY

U.S. economic growth has been just firm enough to weaken the case for additional stimulus through Fed bond purchases. Gross domestic product expanded at a 3 percent annual rate in the fourth quarter but economists expect that it slowed to around a 2.5 percent pace in the first three months of this year.

The Commerce Department will provide its initial reading on first-quarter GDP on Friday.

The Fed described the economy as expanding moderately, just as it did last month, and noted that the unemployment rate had declined but remains elevated. In March it had said the jobless rate had declined "notably."

The central bank bumped up its growth forecast for 2012 but lowered it for the next two years. The forecast showed the central bank expects the jobless rate to fall faster than it did previously.

It also sees inflation higher over the next few years than it saw in January, with a notable rise in its forecasts for this year that takes into account a run-up in gasoline prices.

Still, the Fed does not expect inflation to breach its 2 percent target.

Policymakers nodded to "some signs of improvement" in the housing sector and, while repeating that they expect moderate economic growth in coming quarters, said the recovery should then "pick up gradually."

"To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the committee expects to maintain a highly accommodative stance for monetary policy," the Fed said.

As officials gathered, the government reported that orders for long-lasting manufactured goods plunged 4.2 percent in March, the biggest drop since the economy was nose-diving in early 2009. The data was the latest to suggest the economy lost momentum as the first quarter drew to a close.

(Writing by Jonathan Spicer; Editing by Andrea Ricci, Tim Ahmann, Leslie Adler)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (13)
jw_collins wrote:
The government (you) owes sixteen trillion dollars in hard numbers, and another 60 trillion in unfunded liability (SS etc). The government (via Bernanke et al) also manipulates the rate of interest it pays to float this borrowing, and in the doing creates a savings rate two percent under inflation, which is a most onerous tax which passes buying power from private holders of savings (yours) to government to cover past monetary decisions. Thus, the store of the value of past work/risk/effort degrades each and every year money is held subject to manipulated low interest (easing). Further, consumers, business etc outside the connected too-big-to-fail crowd are not permitted to borrow funds at near zero rate of interest (just try it…I dare you). This is a privilege of the moneyed privileged. Thus, there is absolutely no incentive for the Federal Board to do anything but “stand pat”, and may the long suffering retired who counted on their money to yield something of a return (anything over inflation) fend for themselves…and may those who thought “thrift” was a viable personal strategy end up draining away their store of value so that government can continue the wasting of American fiscal values, and perhaps the eventual ruin of the monetary system.

Apr 25, 2012 7:51am EDT  --  Report as abuse
minipaws wrote:
I’m closing all of my bank accounts today. My money is going to my credit union. The Fed doesn’t control Credit Unions. Funny how smart those hippie Occupy Wall Street kids were. I should have listened closer to what they had to say.

Apr 25, 2012 8:15am EDT  --  Report as abuse
Overcast451 wrote:
Yep, I’ve been with Credit Unions for over 15 years now and in no way do I regret it at all.

Apr 25, 2012 10:26am EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.