Fed keeps stimulus in place as economy “paused”

(Reuters) – The Federal Reserve on Wednesday left in place its monthly $85 billion bond-buying stimulus plan, saying economic growth had stalled but indicating the pullback was likely temporary.

Describing the nation’s job market as continuing its modest pace of improvement, the Fed 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 central bank said after a two-day meeting.

Source: http://www.reuters.com/article/2013/01/30/us-usa-fed-idUSBRE90T0TF20130130

A report earlier on Wednesday showed the economy unexpectedly contracted in the fourth quarter as inventory investment slowed and government spending plunged. Analysts said Superstorm Sandy 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 committee 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,” the Fed said.

A report on Friday is expected to show the U.S. jobless rate remained stuck at 7.8 percent 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 percent, as long as inflation does not threaten to exceed 2.5 percent.

“It’s a message that policy is steady as she goes, the changes (in the Fed’s statement) are relatively minor,” said Julia Coronado, chief North American economist at BNP Paribas in New York.

U.S. stocks and the dollar were little changed after the Fed’s announcement, while prices for longer-dated U.S. Treasuries trimmed losses with the yield on the 10-year note hovering just above 2 percent.

STILL LOOKING FOR LABOR MARKET IMPROVEMENT

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, but said downside risks to the economic outlook remained.

Kansas City Federal Reserve Bank President Esther George, in her first-ever 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 is part of the central bank’s unprecedented efforts to spark a stronger economic 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.

“I believe those $85 billion a month in purchases by the Fed will continue for the rest of the year,” said Tanweer Akram, senior economist at ING Investment Management in Atlanta.

Even so, minutes of the Fed’s last meeting in December, released early this month, showed that a few policymakers thought the program should be halted by the middle of 2013.

Some Fed officials have voiced concern that any benefit from the bond purchases could be offset by mounting costs.

Two potential threats policymakers see are the risk of fueling an asset price bubble and the possibility of harming the functioning of Treasury and mortgage-backed bond markets. Some also worry that the Fed could suffer a loss when it eventually sells bonds to shrink its balance sheet, which might have serious political consequences.

(Writing by Alister Bull and Pedro Nicolaci da Costa; Editing by Andrea Ricci and Tim Ahmann)