Fed Sees Less Risk From Higher Rates While Maintaining QE
Federal Reserve policy makers signaled diminishing concern over higher borrowing costs as they maintained the pace of bond purchases and seek more evidence of sustained growth.
Stocks and Treasuries fell after the central bank refrained from providing stronger signals of prolonged stimulus and limited its comment on the costs of budgetary wrangling in Washington to the observation that “fiscal policy is restraining” growth.
“If you read the statement you would never know there was a government shutdown and heightened uncertainty around that,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, and a former Richmond Fed researcher.
The Federal Open Market Committee in a statement yesterday repeated it will keep buying $85 billion of bonds each month until “the outlook for the labor market has improved substantially.”
The panel, meeting after a government closing this month delayed release of data needed to gauge the health of the economy, said it will “await more evidence that progress will be sustained before adjusting” bond purchases.
The Standard & Poor’s 500 Index declined 0.5 percent to 1,763.31 in New York, while the yield on the 10-year Treasury note climbed 0.03 percentage point to 2.54 percent.
Ben S. Bernanke is pushing unprecedented accommodation into the final months of his Fed chairmanship to safeguard an expansion buffeted by budget cuts, tax increases and the 16-day federal shutdown that reduced growth by 0.3 percentage point this quarter, according to the median estimate in an Oct. 17-18 Bloomberg survey of economists.
At the same time, the FOMC dropped its warning from last month’s meeting that “tightening” financial conditions could impair the four-year expansion.
“The statement is indicating that yields are more or less in the right area given the current economic conditions,” said Thomas Costerg, an economist with Standard Chartered Plc in New York. “They were clearly unhappy when yields were too low in the spring and then clearly too high in September.”
Borrowing costs have declined in recent weeks. The yield on the 10-year Treasury note has fallen from 3.01 percent on Sept. 5. The average 30-year mortgage rate decreased to 4.13 percent last week from as high as 4.58 percent in August.
The central bank also left unchanged its statement that it will probably hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent.
The Fed’s bond purchases will remain divided between $40 billion a month of mortgage bonds and $45 billion in Treasury securities, the FOMC said.
Policy makers repeated that inflation “has been running below the committee’s longer-run objective but longer term inflation expectations have remained stable.”
Price gains have lagged below the committee’s 2 percent target. The Fed’s preferred gauge of inflation, the personal consumption expenditures index, rose 1.2 percent in August and hasn’t breached 2 percent since March 2012.
“They want to see those inflation numbers come up a little bit before they think about changing the path of policy,” Ira Jersey, a New York-based U.S. interest-rate strategist at Credit Suisse Group AG, a primary dealer that trades government securities directly with the Fed, said yesterday in a Bloomberg Television interview.
The FOMC yesterday dropped its reference from last month to strengthening in housing and rising mortgage rates, saying instead that “the recovery in the housing sector slowed somewhat in recent months.”
Fewer Americans signed contracts to purchase existing homes in September, the National Association of Realtors reported this week. The group’s index fell 5.6 percent, the most in more than three years and the fourth straight decline.
Kansas City Fed President Esther George dissented yesterday for the seventh meeting in a row, citing the risk the Fed’s stimulus could create financial imbalances and cause long-term inflation expectations to rise.
The Fed unexpectedly refrained from tapering at its meeting last month, saying it wants more evidence the economy is strengthening. The FOMC won’t reduce the pace of purchases until its March 18-19 meeting, according to the median estimate of the Oct. 17-18 Bloomberg survey of economists.
“If you were looking for dovish signals, you didn’t get it” from the FOMC decision yesterday, said Michael Gapen, a senior U.S. economist at Barclays Plc in New York and former member of the Fed board’s Division of Monetary Affairs. “They’re keeping all of their options open.”
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