US Fed trims stimulus, cuts bond purchases by another $10 billion

The US Federal Reserve continued to curtail its economic stimulus campaign on Wednesday, announcing as expected that it would further reduce its monthly bond purchases because of the progress of the economic recovery.

The Fed emphasised, however, that it expected to continue the centrepiece of its stimulus campaign, the suppression of short-term interest rates. It said that rates would remain at the current level, near zero, "for a considerable time" after it stops adding to its bond holdings, particularly if inflation remains sluggish.

The Fed will add $55 billion in April to its holdings of Treasury and mortgage-backed securities, down from $65 billion in March and $85 billion in December, the central bank's policy-making committee said in a statement released after a two-day meeting.

In a separate set of economic forecasts, also published Wednesday, Fed officials consolidated around the view that the central bank would begin to raise short-term rates in 2015. That was the view of 13 of the 16 officials who submitted forecasts.

The steady course of Fed policy reflected the continued confidence of its officials that the economy continues to recover from the Great Recession. The statement said that "growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions." But it added that the Fed regarded its current efforts as sufficient to produce gradual improvement in the economy, reductions in unemployment and a revival in the low pace of inflation.

Predictions that the economy would grow more quickly in 2014 have not come true. Cold weather and winter storms in some parts of the country appear to have suppressed economic activity. Car sales, for example, fell sharply in January in the coldest parts of the country, according to a recent analysis. But it is not clear whether the difficult winter is a complete explanation. Growth has repeatedly disappointed the Fed's expectations in recent years, and officials have said that judging the impact of the cold will take time - and warmer weather.

The labour market remains weak. The share of adults with jobs has barely increased since the recession, and many people have stopped looking for work, driving the decline in the official unemployment rate.

Inflation also remains sluggish. The Fed's preferred measure of inflation rose just 1.1 per cent during the 12 months ending in January, well below the 2 per cent annual pace the Fed has established as its target. Officials see this as a symptom of the broader economic malaise, and they expect inflation to increase alongside the economy. But the Fed in recent months has communicated growing concern about the trend, highlighting in policy statements that it will act if necessary to raise inflation back to what it regards as a healthier pace. Yet Fed officials remain optimistic about growth in the second half of the year, and eager to halt the expansion of the Fed's bond holdings.

The economic forecasts published on Wednesday showed few changes in comparison with the last forecasts in December. Officials expect slightly softer growth and a slightly faster decline in the official unemployment rate. The forecast now predicts growth no faster than 3 per cent in 2014, compared to a December forecast of up to 3.2 per cent; unemployment is predicted to fall as low as 6.1 percent, rather than 6.3 per cent.

Those two trends normally move in opposite directions. But economic weakness since the Great Recession has steadily reduced the unemployment rate by convincing people without jobs to stop looking for work. Fed officials now forecast that the unemployment rate in 2016 will reach a new equilibrium between 5.2 and 5.6 percent, meaning that they do not believe the rate can be further reduced without precipitating inflation. That is about a percentage point higher than the pre-recession rate.

"We've been changing our near-term forecast a lot, but I haven't really changed my forecast on the second half of this year or 2015," John Williams, president of the Federal Reserve Bank of San Francisco, said this month. "My own view is that the data have not in any way moved against the basic contours of the forecast."

The Fed expanded its holdings of Treasury and mortgage-backed securities by $85 billion each month last year. It cut back to $75 billion in January, and again to $65 billion in February and March. Fed officials have said that they intend to complete the process of gradual cuts by the fall unless the economic outlook changes sharply. William C Dudley, president of the Federal Reserve Bank of New York, said this month that the Fed would hold course so long as growth remained between 0 and 5 per cent a year.

As a result, the Fed's focus has turned almost entirely to its management of short-term interest rates, which it has held near zero since December 2008. In December 2012, the Fed said that it intended to keep short-term rates near zero at least as long as unemployment, which was 7.9 per cent at the time, remained above 6.5 per cent. Officials have since concluded that the rapid fall in the official unemployment rate - to 6.7 per cent in February - overstates the labour market's recovery. In December, the committee took a first step toward clarifying its plans once the threshold is crossed, declaring "that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5 per cent."

As it considers how much more to do, the Fed also faces bubbling concerns about the stability of financial markets. The Fed is trying to strike a delicate balance between encouraging risk taking, and preventing the kinds of excesses that could produce a financial crisis with broad economic consequences.

Ms. Yellen and other senior Fed officials have said repeatedly that they are watching closely and see little reason for alarm. "I'd say my general assessment at this point is I can't see threats to financial stability that have built to the point of flashing orange or red," Ms. Yellen said at a House committee hearing last month.

©2014 The New York Times News Service