Fed keeps stimulus in place as US economy ‘paused’

By Alister Bull and Pedro da Costa, Reuters

WASHINGTON — The Federal Reserve on Wednesday left in place its monthly US$85 billion bond-buying stimulus plan, arguing the support was needed to lower unemployment even as it indicated a recent stall in U.S. economic growth was likely temporary. The U.S. central bank predicted that the nation’s job market would continue to improve at a modest pace, and repeated a pledge to keep purchasing securities until the outlook for employment “improves substantially.”

“Growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors,” the Fed said after a two-day meeting. A report on Wednesday showed the U.S. economy unexpectedly contracted in the fourth quarter as inventory investment slowed and government spending plunged. Analysts said hurricane Sandy, which slammed into a large swath of the U.S. East Coast in late October, also disrupted the recovery.

The Fed has kept overnight interest rates near zero since late 2008 and tripled its balance sheet to about US$3 trillion through purchases of securities, which are aimed at pushing longer-term borrowing costs lower. While the recovery from the 2007-2009 recession has been stubbornly tepid, the Fed’s policy panel voiced confidence it would remain on track with continued help from monetary policy. “The committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the committee judges consistent with its dual mandate,” it said. That was cautiously more optimistic than the Fed had sounded in December, when it emphasized it was “concerned” the economy would not deliver stronger hiring without policy support. “The changes to the policy rationale were tilted to sound more affirmative in nature,” JPMorgan economist Michael Feroli wrote in a note to clients. A report on Friday is expected to show the U.S. jobless rate remained stuck at 7.8 percent for a third straight month in January. The Fed repeated that it would keep overnight rates near zero until the unemployment rate hits 6.5 percent, as long as inflation does not threaten to exceed 2.5 percent.