Fed holds key interest rate, maintains bond-buying
WASHINGTON, USA (UPDATED) - The US Federal Reserve left unchanged near-zero interest rates and its massive bond-buying program on Wednesday, saying growth was modest in the world's largest economy.
Wrapping up a two-day policy meeting, the Federal Open Market Committee (FOMC) said it would continue to buy $85 billion in bonds per month to help tamp down longer term interest rates that have been helping support growth, especially in the housing market recovery.
The bond-purchase program has filled a gap in the Fed's toolkit after the central bank slashed its key federal funds rate to 0% to 0.25% in December 2008 and held it there.
While no one expected a rate hike at the meeting, analysts were surprised the statement provided no signal on when, and how, the Fed will begin to taper its asset purchases. Many believe the move will come at the Fed's September meeting.
Pointing to economic growth "at a modest pace during the first half of the year," the FOMC said it would keep buying mortgage-backed securities at a monthly pace of $40 billion and longer-term Treasury securities at a pace of $45 billion.
Reinvesting the mortgage-backed securities and rolling over maturing Treasury securities, the Fed reiterated, "should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative."
The Fed policymakers appeared a little less optimistic about the economy than they were at the June 18-19 meeting.
In their prior statement, the economy was described as expanding at "a moderate pace," a bit stronger than "modest."
Though the FOMC largely repeated the prior month's statement, citing an improving jobs market and housing sector, this time Fed officials noted "mortgage rates have risen somewhat."
Rates have climbed off historic lows after the Fed in June signaled it could begin to taper the asset-purchase program if the economy continued to improve.
The Fed also raised the issue of the impact of currently tame inflation on the economy.
Part of the Fed's dual mandate of price stability and maximum employment, the panel acknowledged "that inflation persistently below its 2 percent objective could pose risks to economic performance."
It projected inflation would move back toward that target number over the medium term.
The Fed reiterated that it would keep its current monetary policy "for a considerable time" after the asset-purchase program ends "and the economic recovery strengthens."
Earlier in the day the government reported that the US economy grew at a 1.7% annualized pace in the second quarter.
The sluggish pace nevertheless marked an acceleration from 1.1% growth in the first quarter and 0.1% growth in the 2012 fourth quarter.
The central bank and a number of economists expect growth will pick up in the second half of the year.
The Fed repeated that its easy-money monetary policy would be appropriate as long as the unemployment rate remains above 6.5% and longer-term inflation remains no more than 2.5%.
But it again emphasized that it would keep the policy until the outlook for the labor market had improved "substantially" in a context of price stability.
The unemployment rate stood at 7.6% in June. The government's July jobs report, due Friday, August 2, is expected to show the jobless rate ticked down to 7.5%. - Rappler.com