Fed Maintains $85 Billion Pace of Purchases as Growth Pauses

The Federal Reserve will keep purchasing securities at the rate of $85 billion a month after the economy paused because of temporary forces including bad weather.

“Growth in economic activity paused in recent months in large part because of weather-related disruptions and other transitory factors,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington. “Household spending and business fixed investment advanced, and the housing sector has shown further improvement.”

Chairman Ben S. Bernanke has unleashed the power of the central bank to buy unlimited amounts of Treasury and mortgage-backed securities in a bid to end a four-year long period of unemployment above 7.5 percent and bolster an economy that shrank 0.1 percent in the fourth quarter.

“There is no hint that they are giving any thought of backing off current policy and their current stance,” said Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “Growth has slowed and inflation is running below expectations. To the extent the Fed’s decisions are data dependent, all the relevant data suggest they should continue to ease.”

The yield on the 10-year Treasury note fell 0.01 percentage point to 1.99 percent in New York after touching the highest level in nine months today. Yields have risen from 1.72 percent since the Fed announced new bond buying on Sept. 13. The Standard & Poor’s 500 Index fell 0.4 percent to 1,501.96.

Mortgage Bonds

The Fed’s asset purchases will remain divided between $40 billion a month of mortgage-backed securities and $45 billion a month of Treasury securities. The central bank also will continue reinvesting any Treasury securities that mature and will reinvest its portfolio of maturing housing debt into agency mortgage-backed securities.

The Fed repeated that “if the outlook for the labor market does not improve substantially” its purchases will continue.

“Bernanke came out in the last press conference and said this doesn’t mean that policy is on autopilot, but at the end of the day it still is,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “There aren’t going to be any substantial changes for some time.”

The central bank today also left unchanged its statement that it plans to hold its target interest rate near zero as long as unemployment remains above 6.5 percent and inflation remains no more than 2.5 percent.

‘Downside Risks’

“Although strains in global financial markets have eased somewhat, the committee continues to see downside risks to the economic outlook,” the FOMC said. In its previous statement in December, they said global strains posed “significant downside risks.”

Inflation “has been running somewhat below the committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices,” the Fed said.

The central bank has a longer-run goal for inflation of 2 percent on the personal consumption expenditures price index. That index showed a price increase of 1.4 percent from a year earlier in November.

Kansas City Fed President Esther George dissented from the statement, saying she was concerned that “the continued high level of monetary accommodation increases the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.”

Voting Rotation

Fed presidents rotate voting on monetary policy, with George, St. Louis Fed President James Bullard, Chicago Fed President Charles Evans and Boston’s Eric Rosengren joining the committee as voters for 2013.

Economists in a Bloomberg survey all expected the Fed to continue asset purchases at today’s meeting. The median estimate in the survey predicted buying will continue until the first quarter of 2014, with the Fed ultimately buying $1.14 trillion of bonds in the round of purchases begun in September 2012.

The buying has already propelled the central bank’s balance sheet above a record $3 trillion and shows Bernanke’s resolve to further boost an economy where 12.2 million Americans remain unemployed more than three years after recovery officially began. Unemployment has fallen to 7.8 percent in December from 10 percent at its peak in October 2009, yet the Fed has added to bond purchases and extended its commitment to maintain interest rates near zero.

More Progress

The index of U.S. leading indicators rose in December by the most in three months, according to a report last week, signaling stronger housing and job markets will help the world’s largest economy make more progress in the first half of 2013.

Initial jobless claims fell to 330,000 in the week ended Jan. 19, the fewest in five years, according to a Jan. 24 report from the Labor Department. Private employers added 192,000 jobs in January, the most in almost a year, the ADP Research Institute said today.

The Commerce Department reported Jan. 28 that orders for durable goods in the U.S. rose in December for a fourth consecutive month, indicating manufacturing will keep improving in 2013.

Even so, the U.S. economy contracted at a 0.1 percent annual rate in the fourth quarter of 2012, according to a Commerce Department report today, dragged down by the biggest plunge in government defense spending in four decades.

The outlook for fiscal policy, which could include further defense cuts, is still clouded by disagreement in Washington over federal taxation and spending.

Postponed Showdown

One potential showdown was postponed last week when the U.S. House voted to suspend temporarily the nation’s borrowing limit, removing the debt ceiling for now as a tool for seeking deeper spending cuts. The measure, passed 285-144, lifts the government’s $16.4 trillion borrowing limit until May 19.

Republicans plan to use two other approaching deadlines -- the March 1 start of automatic spending cuts and the need to pass a bill by the end of March to fund the government -- to extract spending reductions from President Barack Obama and congressional Democrats.

The risk that spending cuts and tax increases could slow the economy will ensure that the Fed continues its stimulus policies, said Julia Coronado, chief economist for North America at BNP Paribas SA in New York.

“Until we get through some of these fiscal uncertainties, they’re not going to want to risk pulling back,” said Coronado, a former Fed economist, before the Fed statement. “For the next several meetings it’s probably a pretty easy choice. You monitor the risk, but you keep a steady hand and keep expanding this balance sheet.”

The Fed’s asset purchases pushed mortgage rates to record lows to spur improvement in the housing market, whose collapse triggered the longest and most severe recession since the 1930s. The average fixed rate on a 30-year mortgage was 3.42 percent last week, close to the record low of 3.31 percent in November, according to Freddie Mac.

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