Fed doesnt tinker with stimulus as US economy stalls

Written by Reuters | Washington | Updated: Feb 2 2013, 04:01am hrs
The Federal Reserve on Wednesday left in place its monthly $85 billion bond-buying stimulus plan, arguing the support was needed to lower unemployment even as it indicated a recent stall in US economic growth was likely temporary.

The US central bank predicted that the nations job market would continue to improve at a modest pace, and repeated a pledge to keep purchasing securities until the outlook for employment "improves substantially."

Growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors," the Fed said after a two-day meeting.

A report on Wednesday showed the US economy unexpectedly contracted in the fourth quarter as inventory investment slowed and government spending plunged. Analysts said superstorm Sandy, which slammed into a large swath of the US East Coast in late October, also disrupted the recovery.

The Fed has kept overnight interest rates near zero since late 2008 and it has tripled its balance sheet to about $3 trillion through its purchases of securities, which are aimed at pushing longer-term borrowing costs lower.

While the recovery from the 2007-2009 recession has been stubbornly tepid, the Fed's policy panel voiced confidence it would remain on track with continued help from monetary policy.

The committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the committee judges consistent with its dual mandate, it said.

That was cautiously more optimistic than the Fed had sounded in December, when it emphasised it was concerned the economy would not deliver stronger hiring without policy support.

The changes to the policy rationale were tilted to sound more affirmative in nature, JPMorgan economist Michael Feroli wrote in note to clients.

A report on Friday is expected to show the US jobless rate remained stuck at 7.8% for a third straight month in January. The Fed repeated that it would keep overnight rates near zero until the unemployment rate hits 6.5%, as long as inflation does not threaten to exceed 2.5%.

Its a message that policy is steady as she goes, said Julia Coronado, an economist at BNP Paribas in New York.

By and large, the statement was widely as anticipated, and US stocks. SPX, government bonds and the dollar .DXY were little changed after the news.

The Fed noted that consumer spending and business investment had picked up and the housing sector had shown further improvement. It also acknowledged calmer financial conditions in Europe, omitting a December warning that these posed a significant threat, although it said downside risks remained.

Kansas City Federal Reserve Bank President Esther George, in her first policy vote, dissented against continued Fed stimulus, picking up the mantle left behind by Richmond Fed chief Jeffrey Lacker, who dissented at every policy meeting last year.

The Fed's bond-buying program, under which it currently purchases $40 billion of mortgage-backed bonds and $45 billion of longer-dated Treasuries a month, is part of the central bank's unprecedented effort to spark a stronger recovery and drive down unemployment.

Most analysts do not expect the outlook for the labor market to show the substantial improvement the Fed wants to see this year, keeping it on track for further bond buying.