Yellen’s Fed votes for ‘modest’ easing of stimulus

The Federal Reserve Wednesday said it will continue easing its stimulus program for the economy, cutting its purchases of U.S. Treasury and mortgage bonds by another $10 billion a month.

The central bank, after a two-day meeting of its policy committee, said in a statement that the U.S. economy grew more slowly this winter in part because of unusually cold and snowy weather in much of the country. It said the outlook for better growth and continuing job improvement was otherwise the same as it was late last year when the central bank first began paring back its stimulus.

‘Unusually harsh weather has made judging the underlying strength in the economy especially challenging,” said Fed Chair Janet Yellen, in her first news conference since taking over the central bank earlier this year, in explaining the Fed’s moves. She added that the economy overall continues to exhibit mixed signs of improvement, even without the bad weather.

Ms. Yellen made it clear that the Fed wants to continue to nurture the job market, though the new statement removed a reference to the unemployment rate seen in previous statements. The Fed had previously said it would start to consider raising interest rates if unemployment fell to 6.5 percent, but that statement was removed as the unemployment rate has now fallen to 6.7 percent despite only middling gains in employment.

“We know we’re not close to the full employment rate” despite the more rapid fall in unemployment than the Fed expected, she said.

While the economy continues to need some support from near-zero interest rates and the $55 billion of bond purchases that remain on schedule each month, she said, the Fed sees “sufficient underlying strength in the broader economy to support ongoing improvement in the labor market.”

The Fed statement gave no sign interest rates were about to rise, even as the stimulus tapering continues.

The rate-setting committee “continues to anticipate … that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored,” the statement said.

Ms. Yellen may have made a first small slip-up in her efforts to explain when the Fed might start to consider raising short-term rates, which have been near zero since December 2008, after removing its previous guidance specifying a 6.5 percent unemployment rate. The small gaffe sparked a minor sell-off in New York financial markets even as she was speaking Wednesday afternoon.

She said that the Fed would probably start looking at increasing interests rates “as early as six months” after it ends its bond stimulus programs, which at the current pace of removing stimulus at a rate of $10 billion each month, would end in October of this year.

That led many investors to jump to the conclusion that the Fed might start raising short-term interest rates a year from now — much earlier than markets expected — driving the Dow Jones Industrial Average down as much as 209 points at one point even as Ms. Yellen was speaking.

The market recovered a bit, with the Dow closing the day down 114.02 point, or 0.7 percent to 16,222,17. The broader Standard & Poor’s and the tech-heavy Nasdaq markets were also both off 0.6 percent for the day.

However, Ms. Yellen made clear in her news conference that the Fed wants to maintain its flexibility and respond to economic developments that she said could either speed up its schedule of so-called “tapering” or delay it if the economy proves weaker than expected.

“It will be a considerable period after ending stimulus before the committee considers it appropriate to raise rates,” she said. “Even after employment and inflation near [levels targeted by the Fed], conditions may warrant keeping interest rates below normal levels.”

For one thing, she noted, average wage growth in the U.S. has been at about half of historical levels, coming in at an annual rate of 2 percent rather than the 3 percent to 4 percent seen in past economic recoveries. That, the Fed chair said, posed virtually no threat of the kind of wage inflation that historically has prompted the Fed to start raising rates.