US Fed leaves stimulus unchanged at $85 billion
Moneylife Digital Team 19 September 2013

Tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labour market, the US Fed said

The US Federal Reserve has left its $85 billion per month stimulus programme in place, against broad expectations that it would reduce it as the economy grows.


Fed policy makers instead cut their growth forecast for this year and next, suggesting the economy is feeling the impact of Government spending cuts and continues to struggle to break free from the Great Recession.


The Federal Open Market Committee (FOMC) said that although the economy appears to be holding up amid Government “sequester” spending cuts, it “decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”


In addition, it pointed to the impact of a sharp rise in interest rates since May as possibly already slowing the economy.


“The committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall,” it said in a statement at the end of a two-day monetary policy meeting.


“But the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labour market,” it added.


The Fed had been widely expected to begin reducing the bond-purchase programme, aimed at pulling down long-term interest rates, after Fed Chairman Ben Bernanke predicted in May that the stimulus operation could be tapered late this year.


For most analysts, the debate was only over how much the quantitative easing (QE) bond purchases would be cut — with the guesses from $5 billion a month to $25 billion a month.


But the FOMC decision was not a departure from what Bernanke has stated publicly. He has consistently said the taper of the QE programme could begin sometime late this year, if the economy continued to gain broadly.


The FOMC acknowledged that the economy is still expanding “at a moderate pace,” and that labor market conditions — a central focus of current Fed policy — have improved in recent months.


However, it noted, the jobless rate at 7.3% in August “remains elevated.”


The US Federal Reserve has cut its economic growth forecasts for this year and 2014. The US economy was expected to grow between 2.0 and 2.3% this year, instead of the 2.3-2.6% range seen three months ago, the Fed said.


For 2014, gross domestic product growth was trimmed to 2.9-3.1%, from the June estimate of 3.0-3.5%.


The central bank’s unemployment outlook improved slightly for this year and the next.


The 2013 jobless rate was estimated between 7.1% and 7.3%, the Fed said, while in 2014 it would fall to 6.4-6.8%.


The central bank shaved a tenth point off both years’ low-end estimate.


Tame inflation forecasts continued to remain well below the Fed’s 2.0% target for price stability.


The 2013 estimate for core inflation, stripping out food and energy price changes, was unchanged at 1.2—1.3%. The rate was not expected to climb as high as 2.0% until 2015. For the first time, the Fed provided forecasts for 2016.


GDP growth would slow to 2.5-3.3%, while the unemployment rate would fall to 5.4-5.9%. Inflation in 2016 was projected at 1.90-2.0%.


According to the updated forecasts, most Fed policy makers see the first hike in the federal funds rate in 2015.


The FOMC said, after a two-day monetary policy meeting, it was leaving its key rate at an ultra-low 0-0.25%, where it has been since 2008.


The policy makers said they would keep it in this exceptionally low range, where it has been since late 2008, as long as the unemployment rate remains above 6.5% and inflation does not threaten.

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