Federal Reserve Chairman Ben S. Bernanke said the central bank stands ready to add to its stimulus if necessary even after leaving its policy unchanged today and upgrading its view of the economy for this year.
“We remain prepared to do more as needed to make sure that this recovery continues and that inflation stays close to target,” he said at a press conference today following a meeting of the Federal Open Market Committee in Washington. Additional bond-buying is still “very much on the table.”
Treasuries pared losses after Bernanke kept speculation alive that the Fed might embark on a third round of monetary easing after expanding its balance sheet to a record of almost $3 trillion. Central bankers today raised their forecasts for growth and the labor market this year while repeating that borrowing costs are likely to remain “exceptionally low” at least through late 2014.
The FOMC “expects economic growth to remain moderate over coming quarters and then to pick up gradually,” it said in a statement after a two-day meeting. The statement pointed to “some signs of improvement” in housing while saying the industry at the heart of the financial crisis “remains depressed.”
Policy makers are holding off on additional steps to boost the economy amid signs the more than two-year expansion is gaining strength. Still, the jobless rate isn’t declining fast enough to satisfy central bankers, who are also concerned about potential shocks from the European debt crisis.
“Strains in global financial markets continue to pose significant downside risks to the economic outlook,” according to today’s statement. The Fed has cited the risk in its previous five meetings. In March it said those strains had “eased.”
The yield on the benchmark 10-year note was little changed at 1.99 percent at 4:15 p.m. in New York, according to Bloomberg Bond Trader prices, after rising as high as 2.04 percent.
Stocks rose for a second day after Bernanke’s comments and as earnings beat estimates at companies from Apple Inc. to Boeing Co. The Standard & Poor’s 500 Index climbed 1.4 percent to 1,390.7.
Bernanke said that fiscal tightening may weigh on growth as lawmakers seek an agreement to narrow the budget deficit by year-end, before a deficit-reduction law requiring cutbacks takes effect.
‘Bar Is High’
“The bar is high, but it is still on the table given uncertainty with Europe and fiscal policy in the U.S.,” said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago, speaking about the prospects for new easing.
Policy makers today upgraded their forecasts for growth and unemployment this year. They now see the jobless rate at between 7.8 percent and 8 percent, compared with January estimates of 8.2 percent to 8.5 percent. The economy is forecast to expand at 2.4 percent to 2.9 percent, compared with 2.2 percent to 2.7 percent.
They also raised their projections for the inflation rate this year, as measured by the personal consumption expenditures index (SPX), to 1.9 percent to 2 percent, from 1.4 percent to 1.8 percent. The forecasts reflect the so-called central tendency, which excludes the three highest and three lowest projections of 17 policy makers.
Inflation “has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline,” the Fed said today. Gas prices will affect inflation “only temporarily,” it said.
Oil prices have declined since the Fed’s March meeting, and the national average cost of gasoline has fallen to $3.84 a gallon from a 2012 peak of $3.94 on April 4, according to the American Automobile Association.
Bernanke rejected suggestions that the Fed should allow inflation to rise above its 2 percent goal in order to stimulate growth, saying such a move would undercut the Fed’s credibility.
“To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be unwise to do,” the Fed chairman said. It would be “very reckless” to “actively seek a higher inflation rate in order to achieve a slightly” faster reduction in unemployment.
The central bank said it would continue its swap of $400 billion of short-term debt with long-term debt to lengthen the average maturity of its holdings, a move dubbed Operation Twist. The Fed is scheduled to complete the program at the end of June. The Fed also didn’t alter its policy of reinvesting its portfolio of maturing housing debt into agency mortgage-backed securities.
Bernanke echoed Vice Chairman Janet Yellen’s April 11 remarks that the end of Operation Twist won’t amount to a tightening of policy. The benefits of the plan stem from the total amount of new purchases, rather than the “flow” of such buying, he said.
“If that theory is correct, then at such a time that our purchases come to an end, there should be relatively minimal effects on interest rates,” Bernanke said.
Richmond Fed President Jeffrey Lacker dissented for the third meeting in a row. Lacker has said he believes the first increase in interest rates will likely be necessary in 2013.
Fed policy makers met amid renewed concern over Europe’s fiscal crisis. The benchmark Stoxx Europe 600 Index of European countries hit a three-month low on April 23 and has since rallied as companies, including Electrolux AB (ELUXB), posted earnings that beat estimates.
In the U.S., consumer spending is starting to power growth as business investment cools. A report today showed orders for durable goods fell in March by the most in three years, indicating manufacturing will contribute less to growth this year.
Retail sales rose more than forecast in March as Americans snapped up everything from cars and furniture to clothes and electronics. The 0.8 percent gain was almost three times as large as projected and followed a 1 percent advance in February, Commerce Department figures showed April 16.
An April 27 government report may show that gross domestic product rose at a 2.5 percent annual rate in the first quarter, according to the median forecast in a Bloomberg News survey of economists, driven by the biggest increase in household demand in a year.
While Fed officials raised their projections for growth in 2012, they lowered their estimates for next year and 2014. The economy will expand by 2.7 percent to 3.1 percent in 2013 and 3.1 percent to 3.6 percent in 2014, they projected. In January, they predicted growth of 2.8 percent to 3.2 percent next year and 3.3 percent to 4 percent in 2014.
Bernanke said that the lower forecasts may reflect the impact from fiscal tightening, and that Congress needs to reach an agreement to address shortfalls. Bush-era tax cuts are set to expire at the end of the year.
“If no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there’s no chance that the Federal Reserve could or would have any ability whatsoever to offset that effect on the economy,” Bernanke said.
Corporate earnings and an improving economic outlook are powering stock-market gains. The S&P 500 is up more than 10 percent this year.
“Despite its struggle with the sustained period of relative high unemployment, we’re pleased to see some early signs of a slowly improving macroeconomic environment” in the U.S., Muhtar Kent, president and chief executive of Coca-Cola Co. (KO), the world’s largest soft-drink maker, said in an April 17 earnings call.
More than 82 percent of companies in the S&P 500 that reported quarterly results since April 10 topped the average analyst earnings estimate, according to data compiled by Bloomberg as of yesterday. Companies from AT&T Inc. to 3M Co. beat analysts’ earnings projections. International Business Machines Corp. boosted a stock buyback by $7 billion and increased its dividend yesterday.
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