Federal Reserve continues scaling back bond buying
WASHINGTON — With the economy slowly improving, Federal Reserve officials are shifting their efforts from stimulating the recovery to restoring normal monetary policy — although new Chairwoman Janet L. Yellen tried to stress that day remains far away.
Central bank policymakers voted Wednesday to cut the Fed’s bond-buying stimulus program to $55 billion a month, the third reduction since December.
The move, and a promise to continue such “measured” reductions if the job market continues to improve, puts the Fed on pace to end the controversial program this fall.
Yellen and her colleagues on the Federal Open Market Committee also revised guidance about when they might start raising short-term interest rates.
The intention was to signal that those rates would remain low well into the future. But in answering a question at her first news conference, Yellen indicated rates could start rising as soon as early next year.
The comment sent the Dow Jones industrial average tumbling 170 points in a matter of minutes. The index recovered about half the losses but still closed down 114.02 points for the day at 16,222.17.
The market reaction demonstrated the worries investors have that the Fed’s era of easy money is coming to an end. It also underscored the delicate task faced by Yellen in communicating the Fed’s plans after taking over for Ben S. Bernanke on Feb. 2.
“The market is starting to appreciate we’re at the beginning of the beginning of the end,” said Scott Clemons, chief investment strategist of Brown Brothers Harriman Private Banking.
After leading her first two-day policymaking meeting, Yellen sought to send a message that the Fed remained on the same course as it did under Bernanke.
“We are committed to exactly the same set of goals,” she said of her predecessor.
“My goal — and I will throw myself into this as wholeheartedly as I can — is to make rapid progress, as rapid progress as we possibly can, in getting this recovery back on track and putting Americans back to work,” Yellen said. She was careful to add that she also wanted to see low inflation rise back to the 2% annual level the Fed targets.
Fed policymakers voted 8 to 1 to reduce their bond-buying by an additional $10 billion — the same monthly level of reduction done under Bernanke in December and January.
And with the unemployment rate falling faster than anticipated, Fed officials revised their so-called forward guidance on short-term interest rates.
The committee removed a reference in previous statements to keeping the central bank’s benchmark rate near zero as long as the unemployment rate was above 6.5%.The policy statement said the step was taken because the unemployment rate was nearing that threshold — it was 6.7% in February.
Now, Fed policymakers said they would look at “a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments,” in determining when to raise interest rates.
They anticipated keeping interest rates near zero for “a considerable time” after the bond-buying program ends, the statement said.
Yellen said “the new guidance does not indicate any change in the policy intentions of the FOMC, but instead reflects changes in the conditions we face.”
And she made clear she’s not satisfied with the state of the economy even as conditions continue to improve.
“We have had a disappointing recovery,” she said.
But some weak data this winter appeared to have been caused by “unusually harsh weather,” Yellen said. And the Fed’s forecasts for economic growth were downgraded only slightly.
Fed policymakers estimated the economy would expand between 2.8% and 3% this year, down from the December projection of 2.8% to 3.2%. The unemployment rate was forecast to drop as low as 6.1% by the end of the year compared with a projected low of 6.3% in the December forecast.
“She was trying to emphasize ‘Yellen stays the course, this is continuity,’” said Diane Swonk, chief economist at Mesirow Financial.
But then Yellen appeared to step on that message.
When asked to define the length of the “considerable time” between the end of the bond-buying and the first interest rate rise, she said “something on the order of around six months or that type of thing.”
That would mean interest rates would start rising early next year. Investors appeared surprised by the specificity, even though the Fed’s updated projections released Wednesday showed that most of the Federal Open Market Committee members expected the first rate increase to take place in 2015.
“The message we heard today is rate hikes are coming,” said Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi in New York. “It may take some time and require unemployment and inflation moving in the right direction, but the normalization of interest rates is on the Fed’s radar.”
Yellen probably wasn’t looking to move markets, Swonk said. But she learned that’s not difficult to do.
“It was a hard lesson that one utterance can change the meaning of what you say, and every Fed chairman gets to learn it the hard way,” Swonk said.
Aside from the six months comment, Yellen received good reviews.
“I’ve got to give her high marks for her first outing,” Clemons said.
Despite getting highly technical at times, referring to “dot plots” and the broader U-6 unemployment rate, Yellen appeared comfortable and tried to speak in plain language.
She talked about “a lot of kids who are shacking up with their families” because they can’t afford to get a home or apartment, and how “me and my family and friends” know people who’ve had difficulty finding jobs.
“In many ways I feel the buck stops with me” to lead the Fed so it helps get the economy back on track, Yellen said when asked about her first few weeks as chairwoman.
“She really underscored she has the exact same goals as Bernanke did,” Swonk said. “She was much more folksy in her delivery of them. That’s just the way she is.”
