The Federal Reserve will keep up its bond buying at a pace of $85 billion a month even as the world’s largest economy and the job market pick up.
“Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated,” the Federal Open Market Committee said Wednesday at the conclusion of a two-day meeting in Washington. Recent data suggest “a return to moderate economic growth following a pause late last year.”
More than three years into the expansion, the central bank led by Chairman Ben S. Bernanke is pressing on with open-ended purchases of Treasury and mortgage securities to boost the pace of growth and heal a labor market still scarred by the deepest recession since the Great Depression.
The purchases will remain divided between $40 billion a month of mortgage-backed securities and $45 billion a month of Treasury securities. The Fed said that the purchases will continue until “the outlook for the labor market has improved substantially in a context of price stability” and that it will continue to reinvest maturing securities.
The Fed also left unchanged its statement that it plans to hold its target interest rate near zero as long as unemployment remains above 6.5% and inflation is projected to be no more than 2.5%.
Stocks extended gains and Treasury yields remained higher. The Standard & Poor’s 500 Index rose 0.8% to 1,560.63 at 2:42 p.m. in New York, and the yield on the 10-year Treasury note climbed to 1.94% from 1.9% late Tuesday. Industry rate advisory service MBS Highway Wednesday afternoon issued an alert to lock in lower rates, noting a drop in mortgage-backed securities prices, which move the opposite direction from bonds’ rate-indicative yields.
The FOMC said that it “continues to see downside risks to the economic outlook.” It also said that “the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive.”
Kansas City Fed President Esther George dissented for the second meeting in a row, saying she was “concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.”
George has said holding interest rates near zero for too long risks creating financial bubbles. She said in January that prices of assets “such as bonds, agricultural land, and high- yield and leveraged loans are at historically high levels” and may signal market imbalances.
Policy makers lowered their expectations for the unemployment rate at the end of the year to a range of 7.3% to 7.5% from a previous forecast of 7.4% to 7.7%. The economy will expand 2.3% to 2.8% this year, they estimate, compared with their earlier forecast of 2.3% to 3% growth.
Thirteen of the 19 FOMC participants estimated that the first increase in the federal funds rate from its current range of 0 to 0.25% will occur in 2015, the same as at the December meeting.
Forty-four of 45 economists in a Bloomberg survey March 13-18 said the pace of purchases wouldn’t be reduced at today’s meeting. 58% of economists in the survey said officials won’t reduce buying until the fourth quarter or later, while 55% said they expect the Fed to end its quantitative easing entirely in the first half of next year.
Gains in house prices and construction will put more Americans to work this year, according to Bluford Putnam, chief economist at CME Group Inc., the Chicago-based owner of the world’s largest futures market, and a former economist at the Federal Reserve Bank of New York.
“This housing rebound is for real,” Putnam said before the FOMC statement. “We’re getting a decent number of housing starts, and homebuilder stocks have all spent last year recovering. For the first time in 2013 we can really count on the housing sector to create some jobs.”
Fed officials still aren’t satisfied with progress in the labor market. The economy lost 8.8 million jobs as a result of the 18-month recession that ended in June 2009, and it has since regained 5.7 million.
When the central bank began its third round of large-scale asset purchases in September, the most recent Labor Department report showed the unemployment rate was 8.1%. Joblessness fell to 7.7% in February.
Bright spots in the economy such as housing and autos may be dimmed by automatic budget cuts known as sequestration. The reductions went into effect at the beginning of this month, the start of $1.2 trillion of across-the-board cuts to be spread over nine years that will remain in place unless lawmakers and Obama agree on an alternative.
Congressional Budget Office director Doug Elmendorf told lawmakers at a Feb. 13 hearing that the nonpartisan agency estimates the reductions would lower annual gross domestic product growth by 0.6% this year, enough to eliminate 750,000 jobs.
The Fed’s asset purchases have helped support the recovery in the face of the government’s budget cuts and the 2 percentage point increase in the payroll tax that took effect in January.
The central bank’s mortgage bond purchases have driven home-loan rates to record lows.
JPMorgan Chase & Co. this week more than doubled its forecast for U.S. home-price gains in 2013 to 7% and predicts a more than 14% increase through 2015. Bank of America Corp. said this month property values will jump 8% this year, up from a prior estimate of 4.7%.
