Fed Weighing More Bond Buying as Rate Pledge Extended to 2014

Fed Says Benchmark Interest Rate Will Stay Low
The Federal Reserve. Photographer: Brendan Smialowski/Bloomberg

Chairman Ben S. Bernanke said the Federal Reserve is considering additional asset purchases to boost growth after extending its pledge to keep interest rates low through at least late 2014.

Policy makers are “prepared to provide further monetary accommodation if employment is not making sufficient progress towards our assessment of its maximum level, or if inflation shows signs of moving further below its mandate-consistent rate,” Bernanke said at a news conference today after a Federal Open Market Committee meeting in Washington. Bond buying is “an option that’s certainly on the table.”

Stocks and Treasuries rose after the Fed extended its previous pledge to keep borrowing costs low at least until the middle of 2013. Fed officials lowered their forecasts for economic growth and price increases this year and in 2013 and set a long-term goal of 2 percent inflation.

“What they’re doing is setting the table for some sort of additional monetary easing,” said Scott Minerd, chief investment officer in Santa Monica, California for Guggenheim Partners LLC. “The changes in the statement from last month de-emphasize growth.”

The Standard & Poor’s 500 Index climbed 0.9 percent to 1,326.06 at 4:07 p.m. in New York. The yield on the current five-year note fell 10 basis points to 0.80 percent after touching the record low of 0.76 percent.

“The Committee expects to maintain a highly accommodative stance for monetary policy,” the FOMC said in a statement. “Economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

Growth Forecast

The Fed lowered its forecast for growth this year to 2.2 percent to 2.7 percent, down from a projection of 2.5 percent to 2.9 percent in November. It predicted the economy next year will expand 2.8 percent to 3.2 percent, down from a previous forecast of 3.0 percent to 3.5 percent.

The Fed has been “quite active” in its accommodative policies, including through the extension of the rate commitment today, Bernanke said.

“We hope to convey to the market the extent to which there is support on the committee for maintaining rates at a low level for a significant time,” he said.

In a separate statement of its long-range goals and strategy, the FOMC specified a 2 percent goal for inflation, as measured by the annual change in the price index for personal consumption expenditures.

‘Firmly Anchored’

“Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability,” the panel said in a statement. It also enhances “the committee’s ability to promote maximum employment in the face of significant economic disturbances.”

Policy makers declined to specify a goal for employment, saying that it “is largely determined by non-monetary factors.” The committee’s longer-run forecast for the jobless rate is 5.2 percent to 6 percent.

The Fed said it would continue to extend the average maturity of its $2.6 trillion securities portfolio, a move dubbed “Operation Twist.” The Fed also maintained its policy of reinvesting maturing housing debt into agency mortgage-backed securities.

Bernanke said that the extension of the “expected point of takeoff” for rising interest rates to 2014 implies that asset sales by the Fed would occur “later than previously thought,” and “presumably in 2015.”

Omit Description

Richmond Federal Reserve Bank President Jeffrey Lacker dissented because he “preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate,” according to the FOMC statement.

Recent reports on manufacturing, housing and employment indicated that the economy was picking up speed as the new year began.

Employers added 200,000 jobs in December, twice the previous month’s pace, and the unemployment rate dropped to 8.5 percent from 8.7 percent the month before.

Household wealth is getting a boost from rising stock prices. The Standard and Poor’s 500 Index climbed 4.5 percent in 2012 through yesterday, the best start to the year since 1997, when it rallied 6.1 percent in the first 14 days.

Motorcycle Maker

Harley-Davidson Inc., the biggest U.S. motorcycle maker, reported $54.6 million income from continuing operations in the fourth quarter compared with a loss of $42.1 million a year earlier. Sales at the maker of Fat Boy and V-Rod motorcycles rose 12 percent in the U.S.

“There has certainly been some encouraging news recently,” Bernanke said. Still, “we continue to see headwinds from Europe, coming from the slowing global economy and some other factors as well.”

The Fed is not “ready to declare that we’ve entered a new stronger phase” for the U.S. economy, he said.

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