Fed Cuts Stimulus Another $10 Billion, Holds Steady on Interest Rates

(Los Angeles Times/MCT) -

Federal Reserve policymakers on Wednesday cut their monthly bond-buying stimulus program by another $10 billion and held interest rates steady at near zero, offering no suggestions that they will raise them anytime soon as the economic recovery improves.

In a statement after a two-day meeting, the Federal Open Market Committee said it expected that interest rates would remain at their rock-bottom level for “a considerable time” after the bond-buying program ends. The program is on track to conclude in October.

The Fed also downgraded its economic projections for this year and 2015 from estimates made in June. The Fed now forecasts the economy will grow between 2 percent and 2.2 percent this year, compared with a June forecast of 2.1 percent to 2.3 percent.

In 2015, the Fed forecasts the economy will expand between 2.6 percent and 3 percent. In June, the 2015 forecast was for growth between 3 percent and 3.2 percent.

Despite those projections, the Fed thinks the unemployment rate will fall faster than it forecast in June. The rate now could go as low as 5.9 percent by the end of this year and 5.4 percent in 2015.

Some Fed officials, concerned about inflation, have been pushing to signal that interest rates could rise sooner. And two committee members dissented on Wednesday’s statement out of frustration that the so-called forward guidance on interest-rate hikes was not loosened.

Only one committee member dissented to the June statement.

Richard Fisher, President of the Federal Reserve Bank of Dallas, dissented because he believed continued improvement in the economy and labor market “likely warrant an earlier reduction in monetary accommodation than is suggested by the committee’s forward guidance.”

Charles Plosser, President of the Federal Reserve Bank of Philadelphia, dissented in June, and did so again Wednesday for the same reason. He said the Fed’s guidance was “time dependent and does not reflect the considerable economic progress that has been made toward the committee’s goals.”

Most committee members forecast that the Fed will raise interest rates next year.

Inflation continues to run below the Fed’s annual target of 2 percent. The Labor Department reported Wednesday that consumer prices fell 0.2 percent last month, the first drop since April 2013.

For the year ended in August, the Consumer Price Index rose 1.7 percent. The news, along with a slowing of job growth during the summer, reduced pressure on Fed officials to raise interest rates.

Still, the unemployment rate has dropped sharply over the last two years, and the economic recovery has strengthened. Given those improvements, the Fed on Wednesday decided to continue reducing its bond-buying stimulus program.

The Fed began the program in September 2012, purchasing $85 billion a month in Treasury and mortgage-backed securities to try to lower long-term interest rates and stimulate economic growth.

The program — the third round of so-called quantitative easing — along with other stimulus efforts have caused the Fed’s balance sheet to more than quadruple – to $4.4 trillion – since 2008.

Fed policymakers decided in December 2013 to start tapering the purchases. Beginning in January, the Fed has voted to reduce the purchases by $10 billion a month at each of its meetings this year.

Wednesday’s decision means the Fed will purchase $15 billion in bonds next month, when it is expected to vote to end the program.