Fed to Keep Trimming Stimulus as Economy Shakes Off Stall

Photographer: Andrew Harrer/Bloomberg

Janet Yellen, chair of the U.S. Federal Reserve, during an open meeting of the Board of Governors of the Federal Reserve in Washington, D.C., on April 8, 2014. Close

Janet Yellen, chair of the U.S. Federal Reserve, during an open meeting of the Board of... Read More

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Photographer: Andrew Harrer/Bloomberg

Janet Yellen, chair of the U.S. Federal Reserve, during an open meeting of the Board of Governors of the Federal Reserve in Washington, D.C., on April 8, 2014.

The Federal Reserve said it will keep reducing the pace of bond purchases as the economy shakes off the winter doldrums, putting the central bank on a course to end the unprecedented stimulus program by the close of 2014.

Growth “has picked up recently,” the Federal Open Market Committee said yesterday in a statement in Washington, hours after a government report showed gross domestic product barely expanded in the first quarter. “Household spending appears to be rising more quickly.”

The committee pared monthly asset buying to $45 billion, its fourth straight $10 billion cut, and said further reductions are likely in “measured steps.” At that pace, the quantitative easing program intended to push down borrowing costs for companies and consumers would end in December.

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“Tapering is on autopilot,” said Thomas Costerg, a New York-based economist at Standard Chartered Plc. “You need a much bigger swing in the data to stop tapering and much more weakness than just a 0.1 percent print on GDP.”

Stocks and Treasuries rose as the Fed repeated that it’s likely to keep the benchmark interest rate close to zero for a “considerable time” after bond purchases end.

The Standard & Poor’s 500 Index climbed 0.3 percent to close at 1,883.95 in New York. The 10-year note yield dropped four basis points, or 0.04 percentage point, to 2.65 percent. The Dow Jones Industrial Average closed up 0.3 percent at a record 16,580.84.

Inflation Outlook

Fed officials led by Chair Janet Yellen repeated long-term inflation expectations remain stable. The central bank’s preferred gauge of consumer prices climbed 0.9 percent in the year through February and hasn’t exceeded the Fed’s 2 percent goal since March 2012.

The Fed, in its unanimous decision, kept its forward guidance on borrowing costs, saying it will consider a “wide range of information” in deciding when to raise the benchmark federal funds rate, or the cost of overnight loans among banks.

A report earlier in the day from the Commerce Department showed that growth slowed more than forecast by economists, to a 0.1 percent annual pace, following a 2.6 percent gain in the fourth quarter.

The pullback came as snow blanketed much of the eastern half of the country, preventing builders from breaking ground and raising costs for companies.

“The Fed is saying you have to look past the weak GDP numbers and we are past that now,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina.

Consumer Spending

The Fed's Taper

Consumer spending remained strong at a 3 percent pace, the GDP report showed, and recent data on payrolls, manufacturing and retail sales indicate the economy is picking up. Growth is forecast by economists to accelerate to a 3 percent pace this quarter.

Private employment in March exceeded the pre-recession peak for the first time as payrolls excluding government agencies rose by 192,000 workers.

Employers probably added another 215,000 workers to payrolls in April, according to the median forecast in a Bloomberg survey of economists ahead of a Labor Department report tomorrow. The jobless rate is projected to decline to 6.6 percent from 6.7 percent.

While unemployment is down from 10 percent in October 2009, it’s still above the 5.2 percent to 5.6 percent range that the Fed considers full employment.

Jobs Commitment

Yellen said on April 16 the Fed has a “continuing commitment” to support the recovery even as policy makers see the central bank meeting its mandate for full employment by late 2016.

“The larger the shortfall of employment or inflation from their respective objectives, and the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained,” Yellen, 67, said in a speech to the Economic Club of New York.

The Fed last month dropped a commitment to keep the rate near zero at least as long as joblessness exceeds 6.5 percent and the outlook for inflation is no higher than 2.5 percent.

It scrapped the thresholds after the jobless rate fell to 6.7 percent, even as other gauges showed continued weakness.

One example: more than 3.7 million Americans have been unemployed six months or longer. Their share of the total ranks of the jobless exceeded 30 percent for the first time in 2009 and hasn’t fallen below that level since.

Housing Market

The housing market is another source of concern as higher prices and mortgage rates deter buyers. Sales of new homes slumped 14.5 percent last month to a 384,000 annualized pace, the weakest since July.

“The recovery in the housing sector remained slow,” FOMC said in yesterday’s statement.

The stock market has lost momentum as investors questioned whether earnings growth is too slow to justify equity valuations. The S&P 500 is up less than 2 percent this year, following a 30 percent surge last year that was fueled in part by the Fed’s record stimulus.

Even with the headwinds for housing, Wells Fargo & Co. (WFC) posted a 14 percent increase in first-quarter earnings as fewer customers missed loan payments.

“I’m optimistic about future economic growth, because consumers and businesses have continued to improve their financial conditions,” Chief Executive Officer John Stumpf said on an April 11 conference call.

To contact the reporter on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net Mark Rohner

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