Fed scales back stimulus campaign

New York TimesNews ServiceDecember 19, 2013 

WASHINGTON -- The Federal Reserve plans to reduce its monthly bond-buying campaign to $75 billion in January, beginning a retreat from its stimulus campaign because it no longer saw the need for the full force of those efforts.

The Fed sought to offset concerns that it was once again pulling back too soon by reinforcing its intent to hold short-term interest rates near zero "well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the committee's 2 percent longer-run goal."

The steps, announced Wednesday after a two-day meeting of the Fed's policymaking committee, represent the beginning of a long-anticipated shift in Fed strategy. Officials say that the bond-buying campaign, which has totaled $85 billion a month until now, has contributed to a modest increase in job creation, but that they are concerned about the Fed's reliance on a relatively untested form of monetary policy. They would like instead to lean more heavily on "forward guidance" about short-term interest rates, a more familiar policy tool.

"The committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy," the committee said in a statement

Wednesday.

The Fed's actions won the support of Esther George, the president of the Federal Reserve Bank of Kansas City, who has dissented at each previous meeting this year over concerns that the Fed was doing too much. But with the balance swung in favor of her conservative views, the decision drew a dissent from Eric S. Rosengren, the president of the Federal Reserve Bank of Boston, who called it "premature."

The Fed is struggling to calibrate its stimulus campaign in an environment of steady but mediocre growth. The unemployment rate has declined over the past year, reaching 7 percent in November. Wages are barely rising, and the share of adults with jobs has not climbed since the recession.

The Fed over the past year has purchased more than $1 trillion in Treasury and mortgage-backed securities in an effort to encourage job creation.

Fed officials say the purchases have modestly reduced consumer and business borrowing costs, contributing to a rise in auto sales, for example. They say the program also has helped to revive an appetite for risk-taking, driving up stock prices.

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