WASHINGTON – The Federal Reserve said Wednesday that the U.S. economy has strengthened but still needs the Fed’s extraordinary support to help lower high unemployment.
In a statement after a two-day meeting, the Fed stood by its plan to keep short-term interest rates at record lows at least until unemployment falls to 6.5 percent, as long as the inflation outlook remains mild. And it said it would continue buying $85 billion a month in bonds indefinitely to keep long-term borrowing costs down.
Speaking at a news conference, Chairman Ben Bernanke stressed that while the economy has improved, the Fed won’t ease its aggressive stimulus policies until it’s convinced the economic gains can be sustained. An unemployment rate of 6.5 percent is a threshold, not a trigger, for a possible rate increase, he said.
Bernanke also said the Fed might vary the size of its monthly bond purchases depending on whether or how much the job market improves. The unemployment rate has fallen to a four-year low of 7.7 percent, among many signs of a healthier economy.
We are seeing improvement, Bernanke said. One thing we would need is to see this is not temporary improvement.
Jim O’Sullivan, chief U.S. economist at High Frequency Economics, said the Fed appears focused on whether recent improvement continues, and no changes to the (bond) purchase program appear imminent.
But O’Sullivan said he thinks the Fed might scale back its bond purchases in the second half of this year if job growth continues to accelerate.
Brian Bethune, an economics professor at Gordon College in Wenham, Mass., said the Fed’s first move might be to reduce its monthly bond purchases in the October-December quarter of this year and again in the first quarter of 2014.
Reducing the Fed’s bond purchases would likely cause interest rates to rise, making loans more expensive, and possibly cause stock prices to fall.
But investors seemed pleased with the Fed’s decision to maintain its low-interest rate policies indefinitely for now.
The Dow Jones industrial average closed up about 56 points, having risen slightly after the Fed’s statement was released.