Fed doesn’t tinker with stimulus as US economy stalls

Feb 01 2013, 22:31 IST
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SummaryThe 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 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 nation’s 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%.

“It’s 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

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