Fed leaves bond-buy pace unchanged

WASHINGTON - The Federal Reserve has decided to press on with $85 billion in monthly bond purchases, saying it needs to see more evidence that the economy will continue to improve.

“The recovery in the housing sector slowed somewhat in recent months,” the Federal Open Market Committee said Wednesday at the end of a two-day meeting in Washington. “Fiscal policy is restraining economic growth.”

Ben Bernanke is pushing unprecedented accommodation into the final months of his Fed chairmanship as he seeks to shield the four-year economic expansion from the effects of higher borrowing costs and this month’s partial U.S. government shutdown. The 16-day closing resulted in the furloughs of as many as 800,000 federal workers and delayed release of data the Fed says it needs to evaluate the economy.

“Taking into account the extent of federal fiscal retrenchment over the past year, the committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy,” the committee said. The Fed repeated that it will “await more evidence that progress will be sustained before adjusting the pace of its purchases.”

The Fed’s purchases will remain divided between $40 billion a month of mortgage bonds and $45 billion in Treasury securities.

“Wait-and-see seems to be the prescription for the day,” said Scott Anderson, chief economist at Bank of the West in San Francisco. “They’re on hold given that the data haven’t moved in their direction,” said Anderson, who predicts the Fed won’t make its first cut to bond buying until March.

The central bank left unchanged its statement that it will probably hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent.

The Fed repeated that inflation “has been running below the committee’s longer-run objective but longer term inflation expectations have remained stable.”

Price gains have lagged below the committee’s 2 percent long-run target. The cost of living rose as projected in September as fuel charges climbed, capping the smallest year-to-year gain in five months.

The Fed removed a sentence from the previous statement that had said tighter financial conditions could slow the improvement in the economy.

Kansas City Fed President Esther George dissented for the seventh meeting in a row, citing the risk that the Fed’s stimulus could create financial imbalances and cause long-term inflation expectations to rise.

The Fed unexpectedly refrained from tapering at its meeting last month, seeking more evidence the economy is strengthening. Economists surveyed by Bloomberg before the gathering predicted the Fed would begin reducing the pace of purchases.

Borrowing costs have since declined. The yield on the 10-year Treasury note fell to 2.49 percent late yesterday from as high as 3.01 percent on Sept. 5. The average 30-year mortgage rate fell to 4.13 percent last week from as high as 4.58 percent in August.

“There are some question marks about growth in the U.S. economy,” said Nathan Sheets, the global head of international economics at Citigroup Inc. in New York and a former top economist at the Fed board. “The Fed is inclined to watch and wait until they’re comfortable that we’ve seen a meaningful rebound.”

Business, Pages 26 on 10/31/2013

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