Bond Purchases by Fed Will Continue, at Least for Another Month

Charles Dharapak/Associated Press
Ben S. Bernanke, chairman of the Federal Reserve, at a House committee meeting last month.

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WASHINGTON — The Federal Reserve issued a 700-word statement on Wednesday, but four words would have sufficed: see you in September.

As expected, the Fed’s policy-making committee voted to press ahead for now with its campaign to increase job creation. And its statement said nothing about how much longer it would continue to add $85 billion a month to its holdings of mortgage-backed securities and Treasury securities. But the Fed left its economic outlook basically unchanged, suggesting that the central bank still intended to reduce the volume of its purchases later this year.

The statement, issued after a regular two-day meeting of the Federal Open Market Committee, acknowledged the weak pace of growth during the first half of the year, which it described as “modest” rather than “moderate” — the words are synonymous in English but distinct in the Fed’s carefully calibrated lexicon, suggesting an even more lackluster economic performance. But it maintained the Fed’s forecast that “economic growth will pick up from its recent pace” in the coming months, driving job creation.

The statement also repeated language first introduced after the Fed’s previous meeting, in June, that “the committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall,” when the Fed began this latest push aimed at increasing the pace of growth.

Analysts said they expected the committee to cut back at its next meeting in mid-September. Dean Maki, chief United States economist at Barclays Capital, said the statement was “on the dovish side” because of its references to slower growth, rising mortgage rates and low inflation. Nonetheless, he added, “We continue to expect the F.O.M.C. to taper the asset purchase program in September, provided that the next two employment reports are reasonably strong.”

The committee had little time to grapple with the implications of the latest economic data. The government announced earlier Wednesday that the economy expanded at an annual rate of 1.7 percent in the second quarter, better than economists had expected but below the pace that Fed officials regard as necessary to create enough jobs to bring down the unemployment rate.

The Fed repeated its stark assessment that “fiscal policy is restraining economic growth.” It also noted that “mortgage rates have risen somewhat,” a new check on the economy that is at least partly of the Fed’s own creation.

The average interest rate on a 30-year fixed-rate mortgage rose to 4.37 percent in July from 3.54 percent in May, according to a survey conducted by Freddie Mac. But that increase is only partly the result of investor uneasiness about the Fed’s plans; it also reflects an improved economic outlook. And that improved outlook, in turn, is mitigating the impact of the rate increases.

David Hall, president of Shore Mortgage in Troy, Mich., said that the higher rates had cut into demand for refinancing, but that demand for mortgages to buy a home remained strong. “People understand the historical context, that these are still really low rates, and coupled with all the news about home values rising, there’s still a lot of excitement about buying,” he said. “That excitement has overshadowed the rate increases a little bit.”

The Fed has also become more concerned about the sluggish pace of inflation. Prices rose at an annual pace of just 0.8 percent in the second quarter, according to the Fed’s preferred measuring stick, a measure of inflation compiled by the Bureau of Economic Analysis — well below the 2 percent annual pace that the Fed considers healthy. Low inflation can cause problems, although Mr. Bernanke recently noted that the reasons were “hard to explain to your uncle.” The primary cause for concern is the risk that prices will begin to fall, which can plunge the economy into a debilitating cycle of deflation as prospective buyers wait for prices to fall even further.

James Bullard, president of the Federal Reserve Bank of St. Louis, chided his fellow officials for underplaying this risk at the committee’s June meeting. This time the Fed noted the risk in the statement but maintained its official view that the pace of price increases was likely to rise.

The statement was supported by 11 of the 12 members of the Federal Open Market Committee. The sole dissenter was Esther L. George, president of the Federal Reserve Bank of Kansas City, who has dissented at each meeting this year, citing the risks of financial destabilization and higher inflation.

The Fed’s chairman, Ben S. Bernanke, surprised investors after the committee’s June meeting by announcing that the Fed expected to reduce the volume of its monthly asset purchases later this year, and to end the purchases by the middle of next year, so long as economic growth met the Fed’s expectations.

Interest rates rose in response, undermining the purpose of the bond-buying program, but Fed officials have not backed away from the timeline. They have been at pains to emphasize that they are not changing their goals. A reduction in purchases, they say, would reflect a judgment that the Fed has begun to achieve those goals. But at the same time, officials have said that if the economy requires more help, they would prefer to use other instruments.

Mr. Bernanke described this as “a change in the mix of tools” in testimony before the House Financial Services Committee earlier this month, suggesting that the Fed would prefer to extend its policy of holding short-term interest rates near zero rather than once again expanding its bond portfolio.

The shift appears to reflect a reassessment of the potential costs of asset purchases. A number of Fed officials have expressed concern that the bond buying could destabilize markets by, for example, reducing the supply of low-risk assets, distorting prices or encouraging speculation. Other economists, including Lawrence H. Summers, a leading candidate to succeed Mr. Bernanke, have expressed similar concerns about the purchases, which go under the label “quantitative easing.”

At the same time, the Fed has faced persistent questions about the benefits of the purchases. Mr. Bernanke and his allies say the bond-buying, by reducing borrowing costs, has contributed to a recent rise in home and auto purchases. Other economists, however, regard its contribution as minor, at best.

Fed officials and supportive economists also have suggested that the central bank’s asset purchases were valuable in convincing investors that the Fed was maintaining its long-term commitment to suppressing borrowing costs: so long as the Fed is buying bonds, it is not about to start raising rates. That belief has contributed to the buoyancy of the stock market. But this rationale, too, has its critics. James W. Paulsen, chief investment strategist at Wells Capital Management, said that in his view the bond-buying was suppressing growth by treating the economy as if it required life support, which was undermining confidence.

“The Fed is perpetuating a crisis environment by remaining on crisis footing,” Mr. Paulsen said. “It’s time for them to end Q.E. and let the markets see that they can stand on their own.”

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