Fed says economy rebounding, trims bond buying

The Federal Reserve said growth is bouncing back and the job market is improving as it continued to reduce the monthly pace of asset purchases.

“Growth in economic activity has rebounded in recent months,” the Federal Open Market Committee said today in a statement in Washington. “Labor market indicators generally showed further improvement.” Business spending “resumed its advance.”

The FOMC trimmed bond-buying by $10 billion for a fifth straight meeting, to $35 billion, keeping it on pace to end the program late this year.

Chair Janet Yellen and her fellow policy makers are debating how long to keep interest rates near zero as the U.S. labor market improves and inflation moves closer to the Fed's 2 percent goal.

The policy-making FOMC repeated today that it's likely to “reduce the pace of asset purchases in further measured steps” and that it expects rates to stay low for a “considerable time” after the bond-buying ends.

The Fed repeated that inflation “has been running below the committee's longer-run objective, but longer-term inflation expectations have remained stable.”

The personal consumption expenditures index, the Fed's preferred inflation gauge, rose 1.6 percent from a year earlier in April, the most since November 2012. The consumer price index, a separate inflation measure, rose 2.1 percent in May.

The Fed will divide its bond purchases between $20 billion in Treasuries and $15 billion in mortgage-backed securities beginning in July, the FOMC said in its statement.

Steady labor-market gains have bolstered confidence among policy makers that they can wind down asset-buying without endangering the five-year expansion.

Unemployment held at 6.3 percent in May, the lowest in almost six years, and payrolls increased by more than 200,000 for a fourth consecutive month, the first time that's happened since early 2000.

Some measures of employment watched by Yellen show continued weakness. The so-called participation rate, which shows the share of working-age people in the labor force, held at 62.8 percent, matching the lowest since March 1978.

Policy makers are counting on a faster expansion to pull more people back into the labor force. The pace of growth will exceed 3 percent in the final three quarters of the year, according to economists surveyed by Bloomberg, after a 1 percent first-quarter contraction caused in part by harsh winter weather.

Manufacturing grew in May at the fastest pace this year, according to data from the Institute for Supply Management. The ISM's service-industry gauge showed the strongest expansion since August.

“We've seen quite the decent rebound in the second quarter, but more importantly, the momentum is building for the second half,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics in White Plains, New York.

Recent reports show that residential construction is stabilizing after it subtracted from growth over the past two quarters.

Builders broke ground last month on 1 million homes at an annualized rate after 1.07 million in April, the best two-month reading since late 2013.

Residential construction is boosting United Technologies Corp., the Hartford, Connecticut-based maker of Carrier air conditioners and Otis elevators. “The U.S. economy feels pretty good,” Chief Financial Officer Greg Hayes said at a June 5 investor meeting. “We still think there's good momentum,” he said, citing growth in the company's residential businesses.

The quickening economy and better-than-estimated corporate earnings have pushed up U.S. stocks to new highs. The Standard & Poor's 500 Index yesterday closed near the record level reached on June 9.

The Chicago Board Options Exchange Volatility Index, a gauge of S&P 500 swings, fell to the lowest since early 2007. Foreign-exchange volatility also has slowed, falling to an almost seven-year low.

Low financial-market volatility has stirred concern among some policy makers. New York Fed President William C. Dudley said last month it may signal investor complacency about risk, making him “a little nervous.”

The FOMC gained three new voting members for this meeting. The U.S. Senate voted last week to approve the nomination of Lael Brainard, former U.S. Treasury undersecretary for international affairs, as a governor. It also approved Stanley Fischer as vice chairman. Loretta Mester on June 1 succeeded Sandra Pianalto as president of the Cleveland Fed.