Fed cites “pause” in growth, stands by stimulus
WASHINGTON — The Federal Reserve says economic growth “paused” in recent months and reaffirmed its commitment to boost a sluggish U.S. economy by keeping borrowing cheaply for the foreseeable future.
The Fed took no new action after a two-day policy meeting. But it stood behind aggressive steps it launched in December to try to reduce unemployment, in a statement released Wednesday.
Last month the Fed said it would keep its key short-term interest rate at a record low at least until unemployment falls below 6.5 percent. The rate is currently 7.8 percent.
And it said it would keep buying $85 billion a month in Treasurys and mortgage bonds to try to keep borrowing costs low and encourage spending.
Earlier in the day, the Commerce Department said the economy shrank at an annual rate of 0.1 percent mainly because companies restocked at a slower rate and the government slashed defense spending.
In its statement, the Fed said “growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors.”
Despite the slowdown, the statement noted that hiring continued to expand at a moderate pace, consumer spending and business investment increased and the housing sector showed further improvement. And it said strains in global financial markets have eased somewhat, but cautioned that risks remain.
The Fed’s statement was largely expected, and it didn’t move stock or bond prices. It was approved on an 11-1 vote.
Esther George, the president of the Federal Reserve Bank of Kansas City, cast the lone dissenting vote. George, who is a new voting member, expressed concerns about the risk of higher inflation caused by the Fed’s aggressive policies.
In December, the Fed signaled for the first time that it will tie its policies to specific economic barometers. Fed Chairman Ben Bernanke made clear during a news conference that even after unemployment falls below 6.5 percent, the Fed might decide that it needs to keep stimulating the economy. Other economic factors will also shape its policy decisions, he said.
The guidance was designed to give consumers, companies and investors a clearer sense of when super-low borrowing costs might start to rise.
The Fed also said it would continue its bond purchases until the job market improved “substantially.”
When it buys bonds, the Fed increases its investment portfolio and pumps more money into the financial system — something critics say could eventually ignite inflation or create dangerous bubbles in assets like real estate or stocks.
On Friday, the government will release its jobs report for January. The unemployment is expected to remain 7.8 percent. That still-high rate, 3½ years after the Great Recession officially ended, helps explain why the Fed has kept its key short-term rate at a record low near zero since December 2008, just after the financial crisis erupted.
Still, some private economists think the Fed will decide to suspend its bond purchases in the second half of this year. They note that the minutes of the Fed’s December meeting revealed a split: Some of the 12 voting members thought the bond purchases would be needed through 2013. Others felt the purchases should be slowed or stopped altogether before year’s end.