Fed says it will maintain pace of bond purchases

AP Economics WriterJune 20, 2013 

Federal Reserve

Yellen

MANUEL BALCE CENETA — AP

WASHINGTON -- The Federal Reserve offered a hint Wednesday that it's moving closer to slowing its bond-buying program, which is intended to keep long-term interest rates at record lows.

The Fed said it will maintain the pace of its bond purchases for now. But it offered a more optimistic outlook for the U.S. economy and job market.

Its brighter view of the economy could be a signal that the Fed's bond purchases may soon be scaled back. But the statement issued after the Fed's two-day policy meeting gave no indication of when that might happen.

Investors reacted initially by selling both stocks and bonds. The Dow Jones industrial average was down 70 points shortly after the statement came out; minutes earlier, it had been down just 16. The yield on the 10-year Treasury note shot up to 2.27 percent from 2.21 percent just before the statement came out.

In the statement, the Fed says the economy is growing moderately. And for the first time it said the "downside risks to the outlook" had diminished since fall.

Timothy Duy, a University of Oregon economist who tracks the Fed, calls the statement "an open door for scaling back asset purchases as early as September."

The fact that the Fed foresees less downside risk to the job market "gives them a reason to pull back" on its bond purchases, Duy says.

The Fed says it will keep buying $85 billion a month in bonds until the outlook for the job market improves substantially. The goal is to lower long-term interest rates to encourage borrowing, spending and investing. It hasn't

defined substantially.

The central bank also said that it would maintain its plan to keep short-term rates at record lows at least until unemployment reaches 6.5 percent.

The Fed also said that inflation was running below its 2 percent long-run objective, but noted that temporary factors were partly the reason.

The Fed also released its latest economic projections on Wednesday, which predicted that unemployment will fall a little faster this year, to 7.2 percent or 7.3 percent at the end of 2013 from 7.6 percent now. It thinks the rate will be between 6.5 percent and 6.8 percent by the end of 2014, better than its previous projection of 6.7 percent to 7 percent.

"The more upbeat tone and the change in the unemployment forecast will only encourage expectations for action soon," Jim O'Sullivan, chief U.S. economist at High Frequency Economics, wrote in a research note. "We continue to believe that tapering could start at the Sept. 17-18 meeting."

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