What do you think: Can the Fed actually “manage” the risks associated with QE, or has “Helicopter Ben” created a mess he won’t be able to successfully get out of?
As expected, the U.S. Federal Reserve decided on Wednesday to keep interest rates at historic lows and to continue with its $85 billion in monthly bond-buying stimulus, despite a more optimistic labor outlook.
It was a near-unanimous 11-1 vote in favor of the decision, announced at the conclusion of the two-day FOMC meeting. Kansas City Fed President Esther George was the sole holdout.
The Fed said that while fresh information since the January FOMC meeting suggests “a return to moderate economic growth following a pause late last year, fiscal policy has become somewhat more restrictive.”
In defense of its ongoing bond buying, the statement read, “To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee 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.”
The aim remains the same: “to maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader conditions more accommodative.”
Key Takeaways from the FOMC Meeting
Economic Outlook Trimmed:Despite the recent spate of improving U.S. economic data, the Fed cut its 2013 economic outlook slightly to 2.3%-2.8% from 2.3%-3.0% in December 2012.
The reason is sequestration, which went into effect March 1. Across-the-board budget cuts are expected to shave 1.5% off gross domestic product this year.
Employment Outlook Brightens But Still Weak: While labor market conditions have >shown signs of improvement, the Fed said the unemployment rate (7.7%) remains too high to ignore.
Yet, the Fed lowered the projected unemployment rate for 2013 to 7.3%-7.5% from 7.4%-7.7% projected in December. In 2014, Fed economists see unemployment at 6.7%-7%, down from forecasts of 6.8%-7.3% made late last year.
The objective is to get the rate below 6.5% before changing the easy money policies.
Interest Rates To Stay Near Zero; Inflation Stable: The Fed said it will keep interest rates at 0%-0.25%, maintained since December 2008, as long as the unemployment rate remains above 6.5% and inflation runs at no more than 2.5% a year. Those are guidelines, not targets. The Fed doesn’t expect those levels to be touched until 2015.
Government-reported inflation numbers continue to run somewhat below the Fed’s long-term goal of 2%. In addition, long-term inflation expectations remain stable.
Markets Move Higher
Heading into the 2 p.m. release, the Dow Jones Industrial Average hit an intraday record high of 14,545.21, while the Standard & Poor’s 500 Index again moved within reaching distance of its October 2007 high of 1,565.15.
Markets moved sideways until the 2:15 conference offered clarification. After Bernanke made it clear the Fed isn’t about to scale back its quantitative easing program or raise interest rates any time soon, the rally resumed.
The Dow ended the day at 14, 5011.80, up 55.98, or 0.39%. The S&P finished at 1,558.71, up 10.37, or 0.67%. The Nasdaq closed at 3,254.19, up 25.09, or 0.78%.
Gold, which at first rose in the wake of the banking calamity in Cyprus, ended the session modestly lower. The yellow metal slipped $6.40 to $1,607.30 an ounce after the FOMC statement.
Any Changes in 2013?
Fed Chairman Ben Bernanke said the central bank expects to stop buying bonds a long time before it begins raising interest rates. That suggests the bong-buying program could end later this year or early next year, with the first rate increase coming in 2015.
Addressing concerns that the Fed’s QE measures do more harm than good by inflating asset prices, the FOMC said it continues to carefully monitor the situation and the progress being made toward its economic objectives.
In the 2:15 p.m. press conference, Fed Chief Ben Bernanke said the FOMC has had a “thorough discussion of costs and risks” of the QE programs, including the impact to the Treasury Department and risks to “financial stability as investors take on excessive risk in a reach for yield.”
Bernanke said the committee believes these costs and risks “remain manageable.”
By DIANE ALTER, Contributing Writer, Money Morning
March 20, 2013