What Fed didn’t say stirs stimulus-cut speculation

The Federal Reserve kept intact its large-scale campaign to stimulate the economy, saying it was awaiting more evidence of sustainable progress in the recovery.

But while the Fed’s decision Wednesday to hold the line on its monthly $85 billion bond-buying stimulus was widely expected, the central bank’s statement revived the idea on Wall Street that policymakers could still make a reduction of the bond purchases by year’s end.

A first cut in the Fed’s stimulus program, which has helped drive down long-term interest rates, is likely to be small and in itself not a big deal.

But the prospect has had a powerful psychological effect that has shaken global financial markets, which have long depended on a flood of cheap cash.

Fed officials, in their statement issued at the conclusion of a two-day meeting, did not downgrade their view of the recovery, repeating the September characterization of economic activity as “moderate.” The Fed did not directly mention the effect of the partial government shutdown this month.

But Fed officials erased a phrase citing risks from the “tightening of financial conditions” — a reference to a jump in mortgage rates during the summerthat has pinched the housing market. Mortgage rates have come back down some.

“If officials are trying to downplay the impact of the shutdown and are happier with the level of long-term interest rates, then perhaps a December taper isn’t quite as out of the question as we had previously thought,” Paul Ashworth, of Capital Economics, said in a note to clients Wednesday.

Stocks dropped after the Fed’s announcement, an indication that investors may have raised the odds of a tapering in December.

The December meeting is likely to be the last one at which Fed Chairman Ben Bernanke will give a news conference as the central bank’s leader, and he may look to use the occasion to make a move and fully explain the Fed’s policy change, said Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi in New York.

Bernanke’s term as chairman expires in January; the Fed’s vice chair, Janet Yellen, has been nominated to succeed him.

“If he wants to lay the groundwork for his successor on a policy exit, you would think he would start the process,” Rupkey said.

Fed officials have stressed that any policy change will depend on the economic data, particularly the numbers on employment and inflation.

The economic picture appears to have gotten more muddled. Payroll processor ADP said Wednesday that its study showed the private sector added just 130,000 net new jobs this month, below the 150,000 average during the previous year.

What’s more, a government report Wednesday showed that consumer prices in September continued to hover below the Fed’s 2 percent inflation target — adding to the uncertainties that are likely to give the central bank pause in changing course.