The U.S. Federal Reserve Board is hedging against the recovery taking a springtime swoon.
Confronting a spate of soft economic data, Fed officials sought to ensure that Wall Street understands they are prepared to boost their stimulus program if the economy continues to weaken.
The Fed’s policy committee ended a two-day meeting Wednesday, committing again to keeping the benchmark interest rate near zero and to keep on creating $85-billion (U.S.) a month to purchase U.S. Treasuries and mortgage-backed securities.
Both pledges were expected as the Fed is a long way from reaching its employment targets. Unexpected was an explicit statement by the Federal Open Market Committee, that the central bank would calibrate its bond buying – a policy known as quantitative easing – to match economic conditions.
“The committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labour market or inflation changes,” policy makers said in a statement.
That promise was the only notable change from the policy committee’s last meeting in March. Fed chairman Ben Bernanke had indicated previously that the central bank could take such an approach. Now it is official policy, assuring investors that QE won’t be stopped abruptly.
It also is significant because it suggests the Fed is not entirely confident that the recovery can keep up momentum without the support of ultralow interest rates.
“The Fed provided itself with some flexibility for further accommodation if needed,” said Adrian Miller, director of fixed income strategy at GMP Securities in New York.
The Fed described economic growth as “moderate,” noting improvements in the overall state of the labour market, backed by strength in household spending, business investment and housing. Still, officials said the unemployment rate “remained elevated” and that government spending cuts are “restraining economic growth.” Policy makers also said risks are to the downside, meaning they think it is more likely that their assessment is overoptimistic than too pessimistic.
None of that is a significant change from the policy committee’s previous assessment of the economy, suggesting a resolve to look past recent data that suggest the economy lost steam at the end of the first quarter.
Durable goods orders fell more than 5 per cent in February, and construction spending slipped 1.7 per cent in March. On Wednesday, separate reports showed that manufacturing output grew at a slower pace in April than in March, and that private employers added fewer workers last month than economists were expecting. Price measures show inflation is closer to 1 per cent than the Fed’s target of 2 per cent.
The new language in the Fed statement is a “fairly obvious nod to some of the recent softness in economic activity, labour markets, and inflation,” Michael Gapen of Barclays Capital told clients in a note.
Minutes of previous policy meetings and speeches by members of the policy committee depict a group that is starting to worry about the efficacy of their unconventional bond-buying program, yet worried the recovery would stall without their help.
The Fed’s openness to increasing or decreasing the level of its monthly bond purchases reflects the split opinion on the policy committee.
Until recently, the mood on Wall Street was that the Fed was leaning toward tapering quantitative easing later this year. But weaker-than-expected data have economists wondering whether the U.S. recovery is about to enter a dip, as it has done in the spring for the past few years.
By leaving the door open to ramping up quantitative easing, the Fed is suggesting that it, too, is worried the economy could be losing momentum, if only a little. It will decide for sure when policy makers next gather in June.