Fed signals that rate hikes remain in distant future
Comments show support for low-rate environment
A return to a rising interest rate environment remains a
long way off, the Federal Open Market Committee signaled in its June meeting announcement.
The committee voted to hold interest rates at
their ultra-low levels to continue to spur the economy -- while it noted that conditions
are gradually improving -- and reaffirmed plans to continue buying bonds to
hold long-term rates down.
The rate-setting committee of the Federal Reserve System
said that since its last statement May 1, information "suggests that economic activity has been expanding at a moderate pace," using language close to previous statements.
"At 7.6 percent, the unemployment rate remains elevated, as do rates of under-employment and long term unemployment," Federal Reserve Chairman Benjamin Bernanke said during a press conference following the release of the meeting statement.
In addition to announcing its summary of the two-day FOMC
meeting, the Fed released quarterly economic projections showing
the committee is somewhat more optimistic about economic growth next year, raising its projection to a range of 3.0 percent to 3.5 percent GDP growth, from 2.9 percent to 3.4 percent in the previous projection. Most committee members expect to hold off on rate increases until sometime in 2015.
The FOMC controls short-term rates by setting targets for
the federal funds rate -- the rate at
which banks make overnight loans to each other to meet reserve
requirements. As expected, the committee
voted to leave the federal funds target at its range of 0 percent to 0.25 percent.
The key rate is linked to the prime rate, the benchmark that most credit card
agreements use to adjust the variable rates that cardholders pay.
The Fed is also buying Treasury securities and
mortgage-backed securities in a program designed to help keep long-term
interest rates low, providing a lift for the housing sector. The Fed is expected to pull back gradually from bond-buying
-- a process that could take roughly a year, economists say -- before
it would increase interest rates. However, the announcement reaffirmed plans to continue purchases at the current pace of $85 billion per month. Bernanke said the committee expects that purchases will begin to taper off late in 2013, and may come to an end about the time unemployment reaches 7.0 percent.
"The decision the Fed has to make on tapering is still
a question of timing -- you can't keep buying $85 billion of bonds indefinitely,"
said Mark Vitner, senior economist for Wells Fargo. If not for belt-tightening by
federal and state governments, the economy would be growing at about a 2.5
percent to 3 percent pace, he said.
In the weeks leading up to the meeting, rates on long-term
bonds have moved upward on speculation that the Fed is preparing to trim its securities purchases later in 2013. The FOMC's announced goals for the economy are to
reduce the jobless rate to about 6.5 percent, as long as long-term inflation is
tame. The target for inflation is set at
2 percent, with a 2.5 percent rate as the point for reversing course
and hiking interest rates. Bernanke said the figures are thresholds, not triggers.
Inflation figures released by the government on Tuesday
showed plenty of room for the Fed to continue with its easy-money policies. The
Consumer Price Index was up 1.4 percent over the 12 month period that ended in
May. Analysts characterized inflation pressure as modest, as the monthly price
index showed a seasonally adjusted increase of 0.1 percent.
The housing market showed continued strength as well, with
housing starts rising 6.8 percent in May on a seasonally adjusted basis, the
National Association of Home Builders said in an announcement Tuesday. The rise would probably have been stronger if not for
especially rainy conditions, which dampened single-family home
But in the job market, gains continue to be slow in coming.
In May the unemployment rate edged up 0.1 point to 7.6 percent, as job seekers coming
into the labor market outpaced hiring by employers. The members of the committee voted in favor of the statement by 10 to 2.
Some economists see the Fed as becoming increasingly boxed
in. Although job creation remains slow,
the bond market has been going through gyrations because of speculation that
bond purchases will dry up. As the Fed's easing policy continues, the task of
weaning the economy off the stimulus measures will become harder.
"I think it's right to begin to move the focus to when
we would begin" to cut back on securities purchases, Vitner said. "But
there are still enough reasons to keep them in place right now." In addition
to soft job creation, global economic pressures also argue in favor of
continued stimulus, he said, citing recent unrest in Turkey and Brazil. The
demonstrations "are really rooted in struggles that wage earners are
facing today," he said.
Bernanke declined to comment on heightened
speculation about his continued tenure in the job. In an
interview Monday, President Barack Obama said that
Bernanke has already remained in the post longer than expected. Former Fed
Governor Laurence Meyer said the remarks amounted to a dismissal, while other
observers interpreted the comment as signaling that Bernanke will depart at the end
of his term in early 2014. Bernanke was appointed in 2006 by then-President
George W. Bush.
Janet Yellen, appointed the Fed vice-chair by Obama in 2010,
is viewed as the most likely replacement. Questions about Yellen's ability to
handle the public aspects of the chairmanship lead many to believe that Lawrence
Summers, the former Harvard president and former head of the National Economic
Council during Obama's first term, might also be a candidate. A dark horse in
the field is Christina Romer, a former chair of the Council of Economic
Advisers, who is seen as favoring more aggressive stimulus measures.
reporter Kristie Aronow contributed to this report.
Published: June 19, 2013