Improving U.S. economy leads Fed to ease stimulus - Omaha.com
Published Wednesday, December 18, 2013 at 1:48 pm / Updated at 4:44 pm
Improving U.S. economy leads Fed to ease stimulus

WASHINGTON (AP) — The Federal Reserve has sent its strongest signal of confidence in the U.S. economy since the Great Recession struck six years ago: It's decided the economy is finally strong enough to withstand a slight pullback in the Fed's stimulus.

Yet the Fed also made clear it's hardly withdrawing its support for an economy that remains below full health. Chairman Ben Bernanke stressed that the Fed would still work to keep borrowing rates low to try to spur spending and growth and increase very low inflation.

At his final news conference as chairman before he leaves in January, Bernanke managed a delicate balance: He announced a long-awaited and long-feared pullback in the Fed's stimulus. Yet he did so while convincing investors that the Fed would continue to bolster the economy indefinitely. Wall Street roared its approval.

The Fed said in a statement after its policy meeting ended Wednesday that it will trim its $85 billion a month in bond purchases by $10 billion starting in January. Bernanke said the Fed expects to make "similar moderate" cuts in its purchases if economic gains continue.

At the same time, the Fed strengthened its commitment to record-low short-term rates. It said for the first time that it plans to hold its key short-term rate near zero "well past" the time when unemployment falls below 6.5 percent. Unemployment is now 7 percent.

The Fed's bond purchases have been intended to drive down long-term borrowing rates by increasing demand for the bonds. The prospect of a lower pace of purchases could mean higher loans rates over time.

Nevertheless, investors seemed elated by the Fed's finding that the economy has steadily strengthened, by its firm commitment to low short-term rates and by the only slight amount by which it's paring its bond purchases.

The Dow Jones industrial average soared nearly 300 points. Bond prices fluctuated, but by late afternoon the yield on the 10-year Treasury note had barely moved. It inched up to 2.89 percent from 2.88 percent.

"We're really at a point where we're getting to the self sustaining recovery that the Fed has been talking about," Scott Anderson, chief economist of Bank of the West. "It really seems like that's going to come together in 2014."

The Fed's move "eliminates the uncertainty as to whether or when the Fed will taper and will give markets the opportunity to focus on what really matters, which is the economic outlook," said Roberto Perli, a former Fed economist who is now head of monetary policy research at Cornerstone Macro.

But Perli noted that the Fed will continue to buy bonds every month to keep long-term rates down and remains strongly committed to low short-term rates. By keeping rates historically low, the Fed "will continue to remain very supportive of risky assets" such as stocks, Perli said.

The stock market has enjoyed a spectacular 2013, fueled in part by the Fed's low-rate policies. Those rates have led many investors to shift money out of low-yielding bonds and into stocks, thereby driving up stock prices. Still, the gains have been unevenly distributed: About 80 percent of stock market wealth is held by the richest 10 percent of Americans.

In updated economic forecasts issued Wednesday, the Fed predicted that unemployment would fall a bit further over the next two years than it thought in September. And it expects inflation to remain below the Fed's target level.

The Fed expects the unemployment rate to dip as low as 6.3 percent next year and 5.8 percent in 2015. Unemployment has fallen faster this year than policymakers had predicted.

And Fed policymakers predict that their preferred inflation index won't reach its target of 2 percent until the end of 2015 at the earliest. For the 12 months ending in October, the inflation index is up just 0.7 percent.

The Fed worries about very low inflation because it can lead people and businesses to delay purchases. Extremely low inflation also makes it costlier to repay loans.

In its statement, the Fed says it will reduce its purchases of mortgage- bonds and Treasury bonds each by $5 billion. Beginning in January, it will buy $35 billion in mortgage bonds each month and $40 billion in Treasurys.

The bond purchases have helped keep long-term interest rates low to encourage more borrowing and spending.

The Fed's actions were approved on a 9-1 vote. The only member to object was Eric Rosengren, president of the Federal Reserve Bank of Boston. He called the move premature because unemployment remains high and inflation extremely low.

The Fed's action comes after encouraging reports that show the economy is accelerating.

Hiring has been robust for four straight months. Unemployment is at a five-year low of 7 percent. Factory output is up. Consumers are spending more at retailers. Auto sales haven't been better since the recession ended 4 years ago.

What's more, the stock market is near all-time highs. Inflation remains below the Fed's target rate. And the House has passed a budget plan that seems likely to avert another government shutdown next year. The Senate is expected to follow suit.

All of that could enhance the confidence of individuals, businesses and investors.

The economy is improving consistently, and the Fed is "now recognizing the trend and decided to go with the flow," said John Silvia, chief economist at Wells Fargo.

Copyright 2013 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Read more related stories
Cab ride to airport (or anywhere in Omaha) could soon cost more
Vets can compete for start-up cash
Coming to Omaha: fun-focused sports league where every kids gets a trophy, parents promise to keep cool
Beals: Boy offers lessons of service, simplicity
Recalled frozen pasta product has tie to Omaha
Business digest: Lululemon shareholder suit dismissed
Suit challenges a Hollywood pillar: unpaid internships
Nonparents’ resentment grows over impact of companies’ family-friendly focus
Jeff Raikes’ next goal: making philanthropy effective
Restaurants invite customers to dine with their dogs
March unemployment rates up slightly in Nebraska, Iowa
Iowa officials announce plan for Microsoft data center
Lincoln pharmaceutical company wins funding, grant
Fortress Wealth joins Securities America network
USDA orders farms to report pig virus infections
Airbnb event seeks Omaha-area hosts for Berkshire weekend, CWS
Developer wants to transform old Millard Lumber site with housing, commercial buildings
Dip in Nebraska economic index doesn’t reflect outlook
Post Holdings buys Michael Foods
Business digest: Target expands subscription service, adds discount
Rural Mainstreet Index finds slow growth
Earnings roundup: Chipotle says it won’t scare off customers with higher prices
BNSF to add trains to handle fertilizer
Walmart touts lower money transfer fees
In brief: Judge doesn’t make GM take cars off road
Deadline Deal thumbnail
The Jaipur in Rockbrook Village
Half Off Fine Indian Cuisine & Drinks! $15 for Dinner, or $7 for Lunch
Buy Now
< >
SPOTLIGHT »
Inside Business
To submit an announcement for "Inside Business", click here. For questions call (402) 444-1371 or e-mail announcements@owh.com.
WORLD-HERALD ALERTS »
Want to get World-Herald stories sent directly to your home or work computer? Sign up for Omaha.com's News Alerts and you will receive e-mails with the day's top stories.
Can't find what you need? Click here for site map »