WASHINGTON — Although the Federal Reserve's policymaking Federal Open Market Committee made no change in the central bank's easy money stance at it mid-year meeting, Chairman Ben Bernanke signaled the Fed may well reduce the pace of monetary stimulus before too much longer.
For now, the FOMC decided to keep buying $85 billion of bonds per month to hold down long-term interest rates, while keeping short-term rates near zero.
But Bernanke, talking to reporters after the FOMC meeting, said that if the economy unfolds as hoped, the Fed could "moderate the monthly pace of purchases later this year."
And he said this "quantitative easing" could end around the middle of next year.
But Bernanke stressed that ending the bond buying is contingent on the unemployment rate coming down to around 7%, supported by strong enough economic growth to generate job gains. And inflation will need to come back up toward the Fed's 2% target.
Bernanke, going to unusual lengths to talk about how monetary policy might evolve after being asked to do so by his FOMC colleagues, stressed the economic conditionality of asset purchases, saying that the FOMC could reduce them faster if the economy improves more than expected or delay them if it does not. Again, he didn't rule out even increasing asset purchases if needed to support the economy.
He made a sharp distinction between policy regarding asset purchases and its "forward guidance" on the funds rate, making clear that the FOMC will be in no hurry to raise the funds rate after asset purchases end, even if the unemployment rate has fallen to the 6.5% threshold.
Actual rate hikes will depend not just on the unemployment rate, but also on broader economic indicators and on the inflation rate.
Bernanke gave no hint that the Fed is likely to end or disproportionately reduce MBS purchases in the foreseeable future, saying he sees no sign of problems with "market function" in that market.
Bernanke also commented on the likely path the Fed will take when the time comes to normalize its policy. Noting that the FOMC has been reviewing in recent meetings an exit strategy first unveiled in June 2011, Bernanke said, "For today, I will note that, in the view of most participants, the broad principles set out in June 2011 remain applicable."
However, "a strong majority now expects that the Committee will not sell agency mortgage-backed securities during the process of normalizing monetary policy, although in the longer run limited sales could be used to reduce or eliminate residual MBS holdings," he added.
Earlier, the FOMC voted 10 to 2 to keep buying $85 billion per month of Treasury and agency mortgage backed securities, with St. Louis Federal Reserve Bank President James Bullard dissenting in favor of a stronger signal of concern about disinflation. And once again, the Committee left its options open by saying it is "prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes."
The monthly mix of $45 billion in Treasury securities and $40 billion of MBS was left unchanged as well. Fed and his colleagues reiterated that "in determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
The FOMC also kept the federal funds rate near zero and reiterated that it plans to keep it there at least until the unemployment rate drops to 6.5% so long as forecasted inflation does not exceed 2.5% and inflation expectations remain "well-anchored."
Although the stand pat policy was justified on the grounds that unemployment remains "elevated" and inflation is running below the FOMC's 2% target, the policy statement was tweaked in two important ways that could point toward future tapering.
First, the below-target inflation, which St. Louis Federal Reserve Bank President James Bullard felt strongly enough about to dissent, was attributed partially to "transitory influences."
Second, the FOMC altered its characterization of downside risks, saying it "sees the downside risks to the outlook for the economy and the labor market as having diminished since the Fall." By contrast, the May 1 statement said the FOMC "continues to see downside risks to the economic outlook."
On the other hand, the FOMC reiterated that "fiscal policy is restraining growth."
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