Fed Trims QE Pace to $75 Billion on Labor Market OutlookJoshua Zumbrun
The Federal Reserve is trimming its monthly bond purchases to $75 billion from $85 billion, taking the first step toward unwinding the unprecedented stimulus that Chairman Ben S. Bernanke put in place to help the economy recover from the worst recession since the 1930s.
“Reflecting cumulative progress and an improved outlook for the job market, the committee decided today to modestly reduce the monthly pace at which it is adding to the longer-term securities on its balance sheet,” Bernanke said at a press conference in Washington today after a meeting of the Federal Open Market Committee.
Stocks rallied, sending benchmark indexes to all-time highs, as the Fed coupled its decision to taper with a stronger commitment to maintaining an accommodative policy. The Fed said its benchmark interest rate is likely to stay low “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below” the Fed’s 2 percent goal.
“The action today is intended to keep the level of accommodation the same overall and to push the economy forward,” Bernanke said. “We are committed to doing what is necessary to getting inflation back to target.”
Price gains have lagged below the committee’s long-run target. The central bank’s preferred gauge of inflation, excluding food and energy, climbed 1.1 percent in the year through October. It has not breached 2 percent since March 2012.
The Standard & Poor’s 500 Index rose 1.7 percent to 1,810.65 at the close of trading in New York. Ten-year Treasury notes pared losses, with yields rising six basis points to 2.89 percent after climbing as much as nine points.
“The Fed exit has begun, and the economy will guide how quickly they continue to cut back their stimulus,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “They changed the direction of policy today, and once they started this step, history tells you, they won’t reverse it.”
The Fed’s purchases will be divided between $40 billion in Treasuries and $35 billion in mortgage bonds starting in January, Bernanke said.
Bernanke, in the final weeks of his eight-year tenure, is curtailing the purchases that swelled the Fed’s balance sheet almost to $4 trillion as he sought to put millions of jobless Americans back to work. The policy also raised concern that it risked inflating asset-price bubbles even as its economic benefits started to wane.
“The steps that we take will be data dependent,” he said. “If we’re making progress in terms of inflation and continued job gains, then I imagine we’ll continue to do, probably at each meeting, a measured reduction” in purchases. If the economy slows, the Fed could “skip a meeting or two,” and if the economy accelerates it could taper a “bit faster,” he said.
The Fed has said it will keep buying bonds until the outlook for the labor market has “improved substantially.” Bernanke today said the program was on its way to meeting that test.
“We’re just beginning this process now, so by the time we complete this process, I think it’s very likely that we’ll easily pass the hurdle of a substantial improvement in the outlook for the labor market,” he said.
Boston Fed President Eric Rosengren dissented, saying curtailing bond purchases was “premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate.”
Janet Yellen, the Fed’s current vice chairman and President Barack Obama’s nominee to succeed Bernanke, voted in favor of the policy action today. Bernanke said he has “always consulted closely with Janet, even well before she was named by the president, and I consulted closely with her on these decisions, as well, and she fully supports what we did today.”
Kansas City Fed President Esther George, who had dissented from the previous seven FOMC meetings this year citing concern the Fed’s policies could lead to financial instability, did not dissent today.
Policy makers met amid signs the economy and labor market were gaining strength, even as inflation remained subdued.
The jobless rate fell to 7 percent in November, a five-year low, as employers added a greater-than-forecast 203,000 workers to payrolls. Unemployment was down from 10 percent in October 2009, during the recession, and up from 4.4 percent in May 2007.
Retail sales climbed by the most in five months in November, a sign that consumer spending was strengthening as the holiday season began. Industrial production last month increased by the most in a year, a Fed report showed this week.
Companies including Ford Motor Co. are benefiting from rising demand for new cars. Ford said this month it plans to add 5,000 jobs in the U.S. and will introduce 16 new vehicles in North America next year. The payroll expansion will continue following the hiring of almost 6,500 people in 2013.
The Fed’s low interest rates have prompted consumers to buy homes or refinance existing mortgages, sparking a recovery in the housing market that was at the center of the financial crisis.
Housing prices climbed 13.3 percent in the 12 months through September, according to an S&P/Case-Shiller index of prices in 20 cities. The pace of home construction reached a more than five-year high in November as builders added to inventory to keep pace with demand, a report from the Commerce Department showed today.
Growth so far has lagged behind previous recoveries. In the 17 quarters since the recession ended, the economy has expanded at an average annualized rate of 2.3 percent each quarter. That compares with an average of 3.2 percent over the same period following the 2001 and 1991 recessions, and 5 percent following the 1982 recession.
“We have been disappointed in the pace of growth and we don’t fully understand why” it has been slow, Bernanke said today.
The Fed’s debate over when to taper purchases has dominated central banking discussions for much of the year, setting off waves of volatility in financial markets. In May, Bernanke told Congress that the Fed may slow its purchases during the “next few meetings.”
The yield on the 10-year Treasury note climbed to as high as 3 percent in September from as low as 1.61 percent in May, as investors anticipated a reduction in Fed stimulus. The national average 30-year fixed-rate mortgage climbed to 4.58 percent in late August from 3.35 percent in May, according to Freddie Mac.
“As soon as they started talking about tapering, they raised interest rates,” said Julia Coronado, chief economist for North America at BNP Paribas in New York and a former Fed economist.
Bernanke, 60, whose term ends Jan. 31, orchestrated the most aggressive easing in the Fed’s 100-year history and expanded its powers as he battled the financial crisis and then sought to keep the economy growing.
He pumped up the central bank’s balance sheet to $3.99 trillion from $869 billion in August 2007 and has held the main interest rate close to zero since December 2008.