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Fed Signals No Hurry to Raise Interest Rates


WASHINGTON — The Federal Reserve is in no hurry to raise interest rates.

The economic recovery has stayed on course in recent months, and the Fed’s policy-making committee said on Wednesday that it saw no reason to change its own plans, rejecting calls for a faster retreat from its long-running stimulus campaign.

“There are still too many people who want jobs but cannot find them, too many who are working part time but would prefer full-time work, and too many who are not searching for a job but would be if the labor market were stronger,” the central bank’s chairwoman, Janet L. Yellen, said at a news conference.

As expected, the Fed said it would move to end its most recent bond-buying campaign after adding a final $15 billion in October to its holdings of Treasury and mortgage-backed securities, according to a statement published after a two-day meeting of its Federal Open Market Committee.

The Fed also on Wednesday published a description of the plans for the next phase in its slow retreat from its policy to encourage economic growth, including some expected changes in the mechanics of monetary policy.
But it added that it planned to continue the mainstay of its campaign, holding short-term interest rates near zero, for a “considerable time.” The phrase is generally understood to mean that the Fed does not intend to raise rates before the middle of next year. Walking a tightrope, Ms. Yellen emphasized both that a rate increase was not imminent and that the Fed could act sooner. The timing, she said repeatedly, would be determined by data on the actual course of the economy in the coming months.

“That really is so important for market participants to keep in mind,” she said.

Bond investors, the Fed’s primary audience, drove up yields on the benchmark 10-year Treasury bond to 2.6 percent. Stock markets fell sharply in the moments after the Fed released its various statements, then rose sharply, then called the whole thing off. The S.&P. 500-stock index ended the day up 0.13 percent at 2,001.57.

The Fed appeared to be playing for time, delaying decisions about its next steps for as long as possible as it grapples with the limits of its ability to improve economic conditions. Fed officials downgraded their expectations for growth in 2015 in forecasts published at the same time as the policy statement, suggesting that they had once again overestimated the strength of the recovery.

Officials now expect the economy to grow from 2.6 to 3 percent next year, compared with June forecasts for growth of 3 to 3.2 percent.

Despite the disappointing results, officials have generally concluded this is not a reason for the Fed to increase its efforts, but instead evidence that the potential output of the American economy has been permanently reduced by the Great Recession and by long-term problems like an aging population and reduced innovation.

If the Fed pushes too hard, unsustainable growth could eventually generate faster inflation. If it stops pushing too soon, however, damage that could have been repaired by additional stimulus may last indefinitely: Many people who could have found jobs might never return to the work force.

Ms. Yellen spent much of her news conference on Wednesday avoiding questions about this balance, often taking considerable time to say very little.

Still, simply by holding steady, the Fed is prolonging its effort to improve economic conditions, and supporters of the campaign applauded.

“Kudos to the Yellen Fed for not signaling a more hawkish stance in an economy that still needs their support,” wrote Jared Bernstein, a fellow at the Center on Budget Policy and Priorities and a former economic adviser to Vice President Joseph R. Biden Jr. “When it comes to economic policy makers still trying to do something big to help the macroeconomy, the Fed’s the only game in town.”

Critics warned — as they have for several years — that the Fed was doing too much, with potential consequences including inflation and financial instability. The House on Wednesday passed a Republican bill intended to limit the Fed’s flexibility by requiring it to adopt a rule for making monetary policy, and to explain its deviations. The measure was not expected to progress in the Democrat-controlled Senate.

The Fed committee acted by a vote of 8 to 2. Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard W. Fisher, president of the Federal Reserve Bank of Dallas, argued that economic conditions had improved sufficiently for the Fed to signal it could begin to retreat more quickly.

“The growing dissent in voting reflects the increasing disagreement amongst the F.O.M.C. that the Fed chair has been trying to iron out, regarding how much more accommodation the economy still needs to a sustain a robust recovery,” said Michael Dolega, senior economist at the TD Bank Group.

Yet the dissent also obscures the extent of broad agreement within the committee about the course of monetary policy. Of the 17 officials who participate in the policy-making meetings (some of whom do not hold votes this year), all but two predicted that the Fed would raise rates before the end of 2015.

The forecasts also showed relatively little change in the level officials expect interest rates to reach by the end of 2015, although comparisons were muddled by a change in methodology and in the committee’s membership.

A series of long meetings led by Ms. Yellen has produced an agreement on the mechanics of the eventual retreat.

The Fed in recent decades has influenced economic conditions primarily by raising and lowering an interest rate called the federal funds rate. Banks must hold reserves in proportion to their loans, and they sometimes must borrow reserves to remain in compliance. By adjusting the supply of reserves, the Fed controls the price of these loans — and influences a broad range of other interest rates.

But the Fed has flooded the banking system with excess reserves as it buys bonds from banks and credits their reserve accounts. The Fed said on Wednesday that when it came time to tighten financial conditions, it would continue to describe its actions in terms of the familiar funds rate. It will primarily seek to discourage lending, however, by raising the interest rate that banks are paid on excess reserves. In effect, instead of punishing lending, it will reward abstinence.

The Fed said that it also would seek to suppress economic activity when the time came by borrowing money from other kinds of financial companies under a new program it has been testing for the last several years.

Some Fed officials have concerns about broadening the Fed’s role in financial markets, however, and the Fed said it would keep the use of the new program to a minimum.

The central bank also affirmed that it planned to maintain its bond holdings, by replacing matured bonds, until after it starts to raise interest rates. It said that it then planned to allow its holdings to dwindle naturally, without asset sales.

The Fed issued a similar exit plan in 2011, only to find that the economy disappointed its expectations. A government report on Wednesday offered a reminder that the economy remains weak. The Fed regards 2 percent annual inflation as the healthiest pace for the economy, but inflation as measured by the Consumer Price Index rose just 1.7 percent in the 12 months ended in August — and the Fed prefers a separate measure that shows even less inflation than the price index.

Moreover, the forecasts of Fed officials published on Wednesday showed that most now expect inflation to remain below 2 percent during 2015.

Nonetheless, Ms. Yellen suggested the Fed had done what it could.

“We have been at zero for a very long time,” she said. “In a general sense I think we have been lower for longer than many standard policy rules would suggest.”

The internal debate is now between officials, led by Ms. Yellen, still willing to wait a considerable time before raising interest rates, and those who want to move sooner.



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