Fed maintains quantitative easing, says ready to change pace

The U.S. Federal Reserve said Wednesday it has decided to maintain its quantitative easing policy through $85 billion in asset purchases per month, while saying it is ready to alter the pace of the purchases depending on developments in the economy.

In a statement released after a two-day meeting of the Fed's policy-setting Federal Open Market Committee, the central bank also left its benchmark short-term interest rate at zero to 0.25 percent and reiterated its intention to hold the rate steady in an exceptionally low range while the unemployment rate stays above 6.5 percent and inflation is forecast to remain below 2.5 percent.

To support a strong economic recovery and help stabilize inflation in line with the bank's 2 percent target, the Fed "decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month."

But the bank also said it 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."

The new phrase was added to the FOMC statement at a time when Fed participants are believed to be divided over when the bank should wind down the bond purchases.

Some Fed participants preferred to see the bank slow the purchases later this year and stop them by year-end, while two members wanted the bond purchases to continue at least through the end of this year, according to the minutes of the March 19-20 meeting.

"The committee will closely monitor incoming information on economic and financial developments in coming months," the Fed said in the latest statement, adding it will continue the asset purchases and employ its other policy tools as appropriate "until the outlook for the labor market has improved substantially in a context of price stability."

When the fed decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goal of maximum employment and inflation of 2 percent, the statement added.

Wednesday's decision was overwhelmingly supported by the policy board members. Only Esther George, president of the Federal Reserve Bank of Kansas City, voted against it, on the grounds that the continued high level of monetary accommodation would increase the risk of future economic imbalances and could cause an increase in longer-term inflation expectations.

The Fed left its economic assessment unchanged from the previous policy meeting in March, saying, "Economic activity has been expanding at a moderate pace."

"Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated," the central bank said in the statement.

According to Labor Department data released in early April, the jobless rate registered a 51-month low of 7.6 percent in March, down 0.1 percentage point from the previous month, while U.S. employers created only 88,000 nonfarm jobs, roughly half the average market forecast.

While noting improvement in household spending, capital spending and the housing sector, the statement said, "Fiscal policy is restraining economic growth."

The target range of the benchmark federal funds rate has been pegged at zero to 0.25 percent since December 2008.

The central bank said it currently anticipates the ultralow interest rate will be appropriate "at least as long as the unemployment rate remains above 6.5 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the committee's 2 percent longer-run goal and longer-term inflation expectations continue to be well anchored."

The next FOMC meeting is scheduled for June 18-19.