Fed keeps stimulus, warns on low inflation

PERSISTENTLY low inflation could hamper the US economic expansion, the Federal Reserve’s policy-making committee said on Wednesday as it pledged to keep buying $85 billion (R837bn) in bonds every month.

“The committee recognises that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term,” the Federal Open Market Committee said after a two-day meeting. Growth would “pick up from its recent pace”.

Fed chairman Ben Bernanke and his colleagues cited “further improvements” in the labour market, while saying economic growth was “modest” and not indicating the timing for a trim to bond purchases. They are debat- ing whether the economy is strong enough to warrant scaling back stimulus even as the jobless rate persists at 7.6 percent and inflation remains well below the 2 percent target.

“They’re reiterating their expectations that economic growth is going to pick up,” said Jeffrey Rosenberg of BlackRock. “They’re trying to get out of the business of quantitative easing,” referring to the central bank’s programme of asset purchases.

The statement provided no new language on the conditions for maintaining the pace of bond buying and repeated the pledge that policymakers have made since last September to continue purchases until the jobs outlook has improved substantially. “A September tapering announcement still seems likely,” said economist Mark Vitner at Wells Fargo.

The committee’s next meeting is on September 17 to 18.

“The bottom line for the Fed is the downside risks for the econ- omy are diminishing,” Vitner said. “If price gains decelerate to the point they worry about deflation, that might give them some pause” on tapering.

Price increases have stayed below the central bank’s 2 percent target for more than a year. The Fed’s preferred inflation gauge, the personal consumption expenditures index, increased 1 percent through May. The core index, excluding food and energy, rose 1.1 percent.

St Louis Fed president James Bullard dissented from the previous Fed statement, saying the committee should “signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings.” He did not dissent yesterday.

Kansas City Fed president Esther George dissented for the fifth meeting in a row, saying record monetary easing might create financial and economic imbalances and increase inflation expectations. – Bloomberg