Fed Sticks to Stimulus, Worried About Growth Soft Spots

Chairman of the Federal Reserve Ben Bernanke testifies before the House Financial Services Committee on Capitol Hill in Washington, Wednesday, July 17, 2013. (AP Photo/Charles Dharapak)
Charles Dharapak/APFederal Reserve Chairman Ben Bernanke
By Pedro da Costa
and Alister Bull

WASHINGTON -- The U.S. Federal Reserve said Wednesday that it would continue buying bonds at an $85 billion monthly pace for now, expressing concerns that a sharp rise in borrowing costs in recent months could weigh on the economy.

The decision surprised financial markets that were braced for a reduction in the central bank's economic stimulus.

Citing strains in the economy from tight fiscal policy and higher mortgage rates, the Fed decided against a tapering of asset purchases that investors had all but priced into stock and bond markets.

"The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market," the U.S. central bank said in a statement explaining its decision.

Stocks rallied on the Fed statement, with the S&P 500 (^GSPC) index hitting a record high. The dollar fell to a seven-month low against the euro, while prices for U.S. government bonds rose sharply.

"The economy is stabilizing but it's not growing," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York. "The Fed has always said they were data-dependent and data would determine the timing of the taper. But the data that has come out over the past month hasn't been good."

In its statement, the Fed said the economy was still making progress, even in the face of tax hikes and budget cuts in Washington.

"Taking into account the extent of federal fiscal retrenchment, the committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy," it said.

And policymakers made clear they were still mulling exactly when to ratchet back their bond-buying stimulus.

"The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."

Kansas City Federal Reserve Bank President Esther George again dissented, saying she was worried about financial bubbles due to the Fed's low rate policy.

The move comes against the backdrop of a somewhat gloomier outlook for economic growth from U.S. Fed officials.

In a new set of quarterly forecasts, the Fed said it now sees growth in a 2 percent to 2.3 percent range this year, down from 2.3 percent to 2.6 percent in its June estimates. The downgrade for next year was even sharper.

Most policymakers, 12 out of 17, also projected the first hike in overnight interest rates would not come until 2015, even though the forecasts suggested they would likely hit their threshold for considering a rate hike as early as next year.

The Fed reiterated that it won't start to raise rates at least until unemployment falls to 6.5 percent, so long as inflation doesn't threaten to go above 2.5 percent. The U.S. jobless rate in August was 7.3 percent.

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Obama has spent 5 years whining about the mess he inherited but he's created a far bigger one for his successor but will never take any of the blame.

September 18 2013 at 11:39 PM Report abuse -1 rate up rate down Reply

This shows the Obama administration has no real answers and havn't for the five years, and now let us start Obamacare. What a great time to start that. With three more years and really probably more coming of the same thing we are done.

September 18 2013 at 11:31 PM Report abuse -1 rate up rate down Reply
1 reply to Douglas's comment

Obama knows exactly what he is doing he's got investments in bonds more that is brought the more he makes

September 18 2013 at 11:44 PM Report abuse -1 rate up rate down Reply

amazing how those rich guys like stimulis

September 18 2013 at 11:05 PM Report abuse rate up rate down Reply

One thing you must remember THE STUFF HAS TO PASS THE SENATE (REID) democrats control IT !!! For it to stick !!! Obama as well !!! If those last two don't ok it...forget it !!! Thats who is responsible at the end of the day !! The two latter......

September 18 2013 at 10:50 PM Report abuse -1 rate up rate down Reply
1 reply to mjack48's comment

Weren't they the entities who created this?

September 18 2013 at 11:20 PM Report abuse rate up rate down Reply


September 18 2013 at 10:50 PM Report abuse rate up rate down Reply
1 reply to hiram517's comment

He don't care about the VETERANS are our country he's making money off the bonds

September 18 2013 at 11:50 PM Report abuse rate up rate down Reply


September 18 2013 at 10:45 PM Report abuse -2 rate up rate down Reply

One more nail in the coffin, the rich get richer and the poor stay poor . The dollar is sliding into oblivion as a world currency. We are just stumbling along, but going backward in a divided society.

September 18 2013 at 10:42 PM Report abuse rate up rate down Reply
1 reply to mine's comment

Well I guess they were right China's money will be more than ours by 2014 and be the new world currency and ours won't mean nothing

September 18 2013 at 11:52 PM Report abuse rate up rate down Reply

Im sure they will stop the spending just before the presidential elections so the then Obama will have someone to blame when the economy goes into the tank. All this borrow and spend has to come to a breaking point, wouldn't it be far batter to taper it so the impact isn't as drastic? This bubble is being artificially inflated by the fed, when it burst we are in for a world of hurt

September 18 2013 at 9:45 PM Report abuse +3 rate up rate down Reply
1 reply to jimmyv2222's comment

Well you better get ready for the world of hurt

September 18 2013 at 11:53 PM Report abuse rate up rate down Reply

This is all that is left to make it look like the economy is improving.
The banks got richer and wall street is the highest it's ever been.
The dam will break and it's going to hurt us harder this time.

September 18 2013 at 9:36 PM Report abuse +3 rate up rate down Reply

Everyone complains about the people who collect "welfare and other "entitlements" to survive, yet aren't we seeing the same thing here? A 85 Billion dollar a month welfare program for Wall Street and the rich, something this economy can ill afford, more so as it is all being done using worthless paper as backing.
If they want to "pump up " the economy to the tune of this amount why not try getting it into the hands of the people who could use it to actually make a difference, the taxpayers, the citizens, let us have a shot at this mess, put the money to work helping those who were the victims of the financial collapse, not those who have and still profiting from their own misdeeds.

September 18 2013 at 9:24 PM Report abuse +3 rate up rate down Reply