Fed to keep bond-buying stimulus for now

Job seekers attend a fair in Illinois.The Fed Job seekers attend a fair in Illinois.The Fed has said it will hold interest rates low as long as the jobless rate is above 6.5 percent. (July 25, 2013) Photo Credit: Bloomberg

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The Federal Reserve said Wednesday the economy continues to recover but is still in need of support, suggesting to many experts that it will not reduce its bond-buying stimulus at its next meeting in September.

The central bank said after a two-day meeting that it would keep buying $85 billion in mortgage and Treasury securities per month in its effort to strengthen the economy, which it said was still challenged by federal budget tightening. It also pointed to a recent run-up in mortgage rates.

In a post-meeting statement, policymakers described economic activity as having expanded at a "modest" pace in the first half of the year. They had called the recovery "moderate" after their last meeting in June.

The Fed's statement came on the same day the government said the economy grew at a subpar 1.7 percent annual rate in the second quarter. The pace was an improvement from the previous two quarters, which were revised lower. Still, growth remains sluggish and has been below 2 percent for three straight quarters.

Most economists, including those at the Fed, expect growth will strengthen in the second half of the year. That's because they believe businesses will spend more, stronger job growth will fuel more consumer spending and government spending cuts will weigh less on overall growth.

"I don't think the Fed will be ready" to slow its bond purchases in September," said Brian Bethune, an economics professor at Westmont College in Santa Barbara, Calif. "Not only is growth running below their target, but inflation is below where they would like it to be."

In its statement, the Fed said it will keep buying $85 billion a month in bonds to help lower long-term interest rates. And it said it plans to hold its key short-term rate at a record low, near zero, at least as long as the unemployment rate stays above 6.5 percent and the inflation outlook remains mild.

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Stronger job growth has fueled speculation that the Fed could start reducing its purchases as soon as September. But economic growth remains sluggish and unemployment high at 7.6 percent.

U.S. stocks added slightly to gains after the Fed's statement, while prices for U.S. government bonds pared losses and the dollar briefly slipped against the euro and the yen.

"The Fed bought itself some time in terms of when they need to begin to taper" bond purchases, said Brian Jacobsen, a chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wis. "They were painting themselves into a corner with previous statements."

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