The Federal Reserve moved another step toward more normal policies on interest rates Wednesday, noting a gradual improvement in the outlook for the economy and cutting back again on its bond-buying program to stimulate the economy.
Fed Chair Janet Yellen told reporters after the central bank’s two-day rate-setting meeting that the improvement seen in the economy this year should enable the Fed to end its extraordinary bond-purchase programs next month and start raising interest rates from near-zero back to more historically typical levels next year.
But because the job market and other parts of the economy continue to be abnormally weak in the wake of the unusually deep recession and financial crisis of 2008, the Fed will move very gradually, with interest rates not getting close to normal levels until the end of 2017, Ms. Yellen said.
The Fed moves and Ms. Yellen’s comments provoked only a mild reaction from investors, with the Dow Jones index rising a modest 24.88 points to 17,156, which nevertheless marked a new all-time high.
The broader S&P 500 index was also up, rising 2.59, or 0.13 percent, to 2,001.57, while the dollar hit a 14-month high against a basket of other major currencies in the Bloomberg Dollar Index.
Ms. Yellen cautioned that, while the job market has improved significantly this year, with the unemployment rate falling to 6.1 percent and businesses creating new jobs at a solid pace of more than 200,000 a month, “the labor market has yet to fully recover.”
“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,” she said.
The unusually depressed growth of wages, which have barely kept up with inflation — with gains of under 2 percent a year since the recession — is another sign that the labor market is far from a full recovery, she said.
Moreover, she said, the global financial crisis of 2008 unleashed forces that continue to hold back the economy in other ways.
“Mortgage credit is available only to those with pristine credit” in the wake of the housing and mortgage crisis, keeping the housing market from growing more rapidly, she said, while the depressed condition of wages is “holding back consumer spending.” Consumer spending is the main engine of growth for the economy, accounting for about 70 percent of economic activity.
In holding back growth, limited credit and stagnant incomes also have contributed to another missing ingredient in the economic recovery, brisk spending on expansion projects by businesses, she said.
“The slow pace of growth likely suppressed the pace of investment spending,” as businesses saw little reason to expand, which in turn has led to disappointing growth in productivity in recent years, she said.
All of these factors have created a vicious cycle of slow growth begetting more sluggish growth that is difficult to break, she said.
With so many lingering aftereffects from the once-in-a-generation financial crisis and the Great Recession, “it’s necessary and appropriate to have somewhat more accommodative policy for longer than would be normal” after more typical recessions since World War II, she said.
The Fed at the meeting decided to cut back its purchases of mortgage and Treasury bonds by another $10 billion this month and announced that it will end the historic bond-purchase programs next month after its next meeting.
The Fed launched the programs for the first time in the midst of the global financial crisis in 2008 and 2009, and has been gradually moving to end them as the economy gets closer to normal.
In addition, the central bank laid out its plans for managing its bond portfolio and interest rates in a way that signaled that it will move to start raising rates next year, as expected by global financial markets.
• Patrice Hill can be reached at phill@washingtontimes.com.
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