US Fed holds to stimulus plan, citing still high jobless rate

18 September 2013 20:17  [Source: ICIS news]

WASHINGTON (ICIS)--The US central bank said on Wednesday that it will continue its longstanding policy of buying $85bn (€64bn) worth of Treasury bills and mortgage-backed securities each month until the nation's employment picture improves.

In a widely anticipated decision, the Federal Reserve Board said that while US economic activity has been expanding at a moderate pace, the nation’s unemployment rate remains high and mortgage loan rates have been increasing, posing a risk to the housing recovery.

On the plus side, said the board's rate-setting Federal Open Market Committee (FOMC), household spending and business fixed investment have improved while the housing sector has been strengthening.

“But mortgage rates have risen further and fiscal policy is restraining economic growth,” the Fed statement said.

The central bank said that it expects US economic growth will pick up from its current pace and that the nation’s jobless rate will gradually decline to a point that the Fed deems acceptable - which according to earlier Fed statements means a jobless rate of less than 6.5%, well below the current 7.3% unemployment measure.

The committee said that while the US economy is gradually improving, the Fed has “decided to await more evidence that progress will be sustained before adjusting the pace of its purchases”.

“Accordingly, the committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month,” the Fed statement said.

That decision is in contrast with widely held forecasts among economists that the Fed this month would begin to roll back its economic stimulus policy known as quantitative easing (QE).

Taken together, the Fed said, its policy of buying $85bn worth of Treasury bills and mortgage-backed securities each month “should maintain downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery”.

In a part of the statement that suggests the Fed will not roll back its accommodative stimulus policy anytime soon, the committee added that the Fed “will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labour market has improved substantially”.

In what has become almost a standard declaration, the Fed also said it would continue its longstanding rock-bottom federal funds interest rate of 0-0.25% until the nation’s jobless rate falls below 6.5% - as long as inflationary pressures remain muted.

($1 = €0.75)

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By: Joe Kamalick
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