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Fed suggests more easing if economy falters

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(Globalpost/GlobalPost)

The Federal Reserve held its easy-money policies in place Wednesday but left the door open to step up bond purchases if the economy slows under the government's severe "sequester" spending cuts.

The central bank's policy board, the Federal Open Market Committee, said after a two-day meeting that the economy continues to grow at a "moderate" pace.

But it also said that growth is being restrained by the cuts to government spending implemented since the beginning of March.

It also suggested, in a change from previous statements, that it would keep open the option of more stimulus -- larger bond purchases -- if the economy slows.

As widely expected, the FOMC kept its key interest rate at zero to 0.25 percent, where it has been since December 2008 to try to bolster recovery from the Great Recession.

And the Fed policy makers also stuck to their $85 billion a month bond-buying program, known as quantitative easing (QE), to keep downward pressure on longer-term interest rates, support mortgage markets and ease credit.

But the FOMC said it continued to see downside risks to the economic outlook. It said it would step up or rein in the bond purchases if conditions warranted.

"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," it said, in a change of language from previous statements.

Earlier this year, as some policy makers warned of inflation concerns, the Fed and analysts were more focused on the option of winding down QE.

But this week's meeting came after a recent series of poor economic reports and data showing inflation falling.

On Monday the Commerce Department reported the Fed's preferred inflation indicator, the personal consumption expenditures price index excluding food and energy, rose just 1.1 percent in March from a year ago.

If inflation continues to fall and growth slows, it could merit an expansion of QE stimulus, the Fed's language suggests.

The Fed policy makers reiterated that inflation was not a significant concern, saying it was running "somewhat below" the FOMC's 2.0 percent objective, and that they expected it to stay at or below 2.0 percent over the medium term.

"When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2.0 percent."

Ryan Sweet of Moody's Analytics said the discussion of adjusting the Fed's asset purchases appeared to have been better balanced than at its March meeting "as a lack of inflation has some Fed officials beginning to stir."

But he said the Fed was in "wait-and-see mode."

"Unless the spring swoon turns into something worse, causing unemployment to resume rising and/or inflation to ease further, we don't expect any changes to monetary policy," Sweet said.

Barclays economist Michael Gregory said the FOMC was not ready to publicly acknowledge an economic "soft patch" at this stage, especially the kind of slump in 2011 and 2012 that led the Fed to ease further.

"However, the message seems to be if a 2011/2012-type soft patch does indeed emerge, the Fed will likely increase QE (and do other things as well)," Gregory said in a research note.

The FOMC said the labor market had improved somewhat in recent months, but the unemployment rate remains "elevated," at 7.6 percent, higher than the 6.5 percent benchmark for winding down accommodative policy.

Household spending and business fixed investment has climbed and the recovering housing sector had further strengthened, it said.

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http://www.globalpost.com/dispatch/news/afp/130501/fed-suggests-more-easing-if-economy-falters