U.S. Fed decides to keep its monetary stimulus intact

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U.S. Fed decides to keep its monetary stimulus intact

(Xinhua) 08:12, October 31, 2013

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WASHINGTON, Oct. 30 -- The U.S. Federal Reserve said Wednesday that it would keep its easy monetary policy unchanged to bolster economic growth and job creation.

Wrapping up a two-day policy meeting, Fed officials agreed to hold the 85-billion-dollar monthly bond purchases steady for now and wait for more evidence that economic progress will be sustained before making any adjustment, a decision widely expected.

Available information since September generally suggested that economic activity has continued to expand at a "moderate pace," the Fed's policy-setting Federal Open Market Committee said in a statement issued after the meeting.

However, recovery in the housing sector slowed somewhat in recent months and fiscal policy is restraining economic growth, it said.

It recognized that inflation persistently below its 2 percent objective could pose risks to economic performance, but anticipated that inflation will move back toward its objective over the medium term.

"In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back to its longer-run objective," the Fed said.

It also pledged to keep the short-term interest rates at near- zero range as long as the unemployment rate remains above 6.5 percent and the inflation between one and two years ahead is projected to be no more than 2.5 percent.

The U.S. central bank is currently buying 45 billion dollars per month of Treasury debts and 40 billion dollars per month of mortgage-backed securities.

It surprised markets in September when the Fed officials decided not to reduce the bond purchases after months of speculation that the first tapering would come later this year if economy evolved as the Fed expected.

Analysts said lingering fiscal uncertainty and mediocre September jobs report blurred the Fed's policy path. The U.S. economy added fewer jobs in September than market expectations despite a tickdown of the unemployment rate from 7.3 percent to 7. 2 percent. The growth of 148,000 jobs was slower than the previous 12-month average of 185,000.

The short-term fiscal deal struck by both parties earlier this month to fund the government and raise the debt ceiling could only serve as a temporary fix.

"There is considerable uncertainty about the timing of tapering, and how that decision is going to be affected by the fact we kicked the can down the road on fiscal policy," said David Stockton, a senior fellow with the Peterson Institute for International Economics, in a recent interview with Xinhua.

Furthermore, the labor market has not improved as much as that 7.2 percent (unemployment rate) has suggested, he added.

The former Fed chief economist said fiscal consolidation placed unwelcome burden on the monetary policy and the central bank itself has created some difficulties in its policy communications.

"The talk of tapering is premature in spring," he said, adding that the Fed later on did too little to talk back the market expectation of the first reduction in bond purchases in September.

It would be helpful if the Fed revisits their communications and tries to talk more thoroughly about what they are thinking about the economic situation and the financial market costs they might be worrying about, Stockton noted.

He expected that the Fed would begin scaling back the bond purchases in the first half of next year, and "March is a little more likely than January."

"December is not off the table," he said, if the coming economic indicators are really strong. But Stockton didn't think that is going to be the case and the Fed won't have a clear sight on the economy until the early part of next year.