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5/1/13

Fed Keeps Interest Rates Low, Continues Bond Buying Program

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The Federal Reserve held fast to its ultra-accommodative monetary policy Wednesday, solidified by what board members described as an economy weakened by fiscal policy.

Interest rates will remain at historically low levels while the U.S. central bank will not alter its $85 billion a month asset purchasing program, the Fed's Open Markets Committee decided at this week's meeting.
While recent meetings have been remarkable for signs of dissent over the long-standing Fed policy, the sentiment this month turned towards concerns about "downside risks" to growth, though the FOMC made no mention of the recent set of weak economic data.
Language in the FOMC statement after the meeting saw one notable change - a declaration that it would increase or decrease the pace of its asset purchases depending on conditions.
The committee statement passed by an 11-1 vote, with Esther L. George again dissenting over fears that massive Fed money-creation could spur inflation. The central bank's balance sheet has ballooned to more than $3.3 trillion.
"The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes," the statement said.
It was a nod to investors, who have relied on aggressive Fed policy to boost asset prices and, hopefully, to bolster the economy.
"We would argue that for the time being the slower period of growth is largely the result of external events while the fiscal headwinds are hampering the Fed's efforts at a reducing pace over time," said Andrew Wilkinson, chief economic strategist at Miller Tabak.
While stocks have soared to new highs, the economy remains in slow-growth mode as it has throughout Chairman Ben Bernanke's term, which began just before the onset of the financial crisis.
The stock market reacted little to the 2 pm news, maintaining an earlier selloff spurred over jobs fears.
Fed officials have long bemoaned Washington fiscal policy, with Congress and the White House in a continued stalemate that has resulted in a raft of mandated tax increases and spending cuts known as the sequester.
The May FOMC statement kept up the heat.
"Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth," the statement said.
The Fed's decision came the same day as a report on private payrolls fell well below expectations, indicating just 119,000 new jobs created, a seven-month low.
While critics worry about inflation, the Fed continued to conclude that "expectations have remained stable."
The Fed has vowed to keep interest rates exceptionally low until unemployment falls to 6.5 percent from its current 7.6 percent and until inflation reaches 2.5 percent from its current 1.5 percent. 
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