Federal Reserve officials sought on Thursday to calm investors by assuring them the Fed won't start trimming its bond purchases until the economy has strengthened. They said any pullback in the Fed's stimulus will hinge on the economy's performance, not a calendar date.
The Fed is buying $85 billion a month in bonds to try to keep long-term interest rates low to spur borrowing and spending. Chairman Ben Bernanke jolted investors last week when he said the Fed will likely slow its bond buying this year if the economy continues to improve.
William C. Dudley, president of the Federal Reserve Bank of New York, whose district includes Long Island, said Thursday that if the economy proves weaker than the Fed forecasts, he expects the bond purchases to continue.
The Fed's timetable for its bond purchases depends on its outlook for the job market and the economy, Dudley said at a news conference in New York.
"If labor market conditions and the economy's growth momentum were to be less favorable," he said, "I would expect that the asset purchases would continue at a higher pace for longer."
Jerome Powell, a member of the Fed's board in Washington, said investors appear to have incorrectly concluded that the Fed will taper its purchases soon.
"The path of rates will ultimately depend on the path of the economy," Powell said in an appearance at the Bipartisan Policy Center, a Washington think tank, adding, "I want to emphasize the importance of data over date."
A third Fed official, Dennis Lockhart, president of the Atlanta Fed bank, said yesterday that "the pace of purchases, the composition of purchases and the ultimate size of the Fed's balance sheet still depend on how economic conditions evolve." Lockhart likened the Fed's efforts to the use of a nicotine patch to help someone give up smoking.
"It seems to me the chairman said we'll use the patch [and use it flexibly], and some in the markets reacted as if he said 'cold turkey,' " Lockhart told an audience in Marietta, Ga.