MercoPress. South Atlantic News Agency

Fed continues with bond purchases: shutdown of US government affected reliable stats

For the seventh meeting running Kansas City Fed President Esther George dissented citing the risk the Fed’s stimulus could create

The Federal Reserve decided on Wednesday to press on with the 85 billion dollars in monthly bond purchases, saying it needs to see more evidence that the economy will continue to improve.

“The recovery in the housing sector slowed somewhat in recent months,” said the release from the Federal Open Market Committee at the end of a two-day meeting in Washington. “Fiscal policy is restraining economic growth”.

Chairman Ben Bernanke is pushing unprecedented accommodation into the final months of his Fed chairmanship as he seeks to shield the four-year economic expansion from the impact of this month’s partial U.S. government shutdown. The 16-day closing resulted in the furloughs of as many as 800,000 federal workers and delayed release of data the Fed says it needs to evaluate the economy.

“Taking into account the extent of federal fiscal retrenchment over the past year, the committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy,” the committee said. The Fed repeated that it will “await more evidence that progress will be sustained before adjusting the pace of its purchases.”

The Fed’s purchases will remain divided between 40 billion a month of mortgage bonds and 45 billion in Treasury securities.

Kansas City Fed President Esther George dissented for the seventh meeting in a row, citing the risk the Fed’s stimulus could create financial imbalances and cause long-term inflation expectations to rise.

US consumer and business confidence has been dented by the bitter political fight that triggered the government shutdown and pushed the nation to the brink of a potentially devastating debt default, and a slew of recent data has pointed to economic weakness.

Reports showed US private-sector employers hired the fewest number of workers in six months in October, while inflation stayed under wraps last month. Other recent data on hiring, factory output and home sales in September had already suggested the economy lost a step even before the government shut down. Readings on US consumer confidence this month have shown the fiscal standoff rattled households.

The soft tone in the data has led markets to recalibrate forecasts for a tapering in the bond purchases and has pushed rate hike expectations back into mid-2015 at the earliest.

Before the FOMC statement's release, futures markets indicated a 52% chance of the first quarter-point rate hike by April 2015; that rose to 96% by September 2015. Yields on the 10-year U.S. Treasury note have fallen back to 2.50%, compared with almost 3% in early September.

In response to the deepest recession and weakest recovery in generations, the US central bank cut interest rates to near zero and more than quadrupled its balance sheet to 3.8 trillion dollars.

The response has not been uncontroversial, with some Fed hawks and many Republicans arguing there is a risk of runaway inflation or financial market bubbles.

However, core Fed officials, including Chairman Ben Bernanke and his presumptive successor, Vice Chair Janet Yellen, have argued that the threat of persistently high unemployment is the most pressing issue right now.

Data today showed consumer price inflation at just 1.2% in the year through September, well below the central bank's 2 percent target.