Despite improving economy, Fed will continue stimulus
Chairman Ben Bernanke and the Federal Reserve Board of Governors announced Wednesday the Fed will continue pumping $85 billion per month into the economy, despite falling market and economic risks cited in its last report.
In a statement released Wednesday the board said economic activity is expanding moderately, with labor market conditions improving. Household spending and business investment is up, with the housing market showing a growth in mortgage interest rates.
Despite the economic uptrend described in the report, the Fed also announced it would continue to purchase agency mortgage-backed securities in the amount of $40 billion per month, along with another $45 billion per month in long-term Treasury securities, “to support a stronger economic recovery.”
In a press conference following the statement’s release, Bernanke said the Federal Open Market Committee (FOMC) would continue buying bonds until unemployment falls to 7 percent, down the its current 7.6 percent. Bernanke repeated the FOMC plans to keep interest rates low until unemployment would fall another .5 percent to 6.5 percent, or until inflation rises above 2.5 percent.
The FOMC is the Federal Reserve committee charged with national open market operations oversight — the purchase and sale of U.S. Treasury securities.
“We will ease the pressure on the accelerator gradually,” Bernanke said, likening the Fed’s quantitative easing (QE) to stepping on the gas pedal in a car in order to dive faster. Central banks use QE as an abnormal stimulus to national economies when normal fiscal policy does not achieve desired results.
“Any need to apply the brakes,” by reducing economic stimulus, “is still far in the future,” Bernanke said during Wednesday’s press conference.
“Our policies are tied to how the outlook evolves. That should provide some comfort to markets, because they should understand, I hope, that we will be providing whatever support is necessary. If the economy improves the way we expect, we will provide support,” Bernanke said.
With the economy improving, Bernanke said Fed bond-purchases could slow near the end of 2013 — in line with projections that unemployment will be at 7 percent by then — and end in 2014.
Market reactions were fierce over the course of the chairman’s announcement. The Dow Jones Industrial average fell 206.4 points, 1.4 percent, to close at 15,112. Standard & Poor’s 500 index lost 22.88 points, 1.4 percent, ending the day at 1,628.93. The Nasdaq composite index dropped 38.98 points, 1.1 percent, finishing at 3,443.20.
In response to a question about the chairman’s rumored retirement at the end of his current term, Bernanke said, “We just spent two days working on monetary policy issues, and I want to keep the discussion focused on policy. I don’t have anything for you on my personal plans.”