The Federal Reserve agreed Wednesday to keep its “easy money” policies going full tilt for now, hoping to calm markets that have gyrated recently over speculation of a possible early scaling back of the Fed’s massive stimulus.
In a statement after a two-day meeting, the Fed said it will continue to buy $85 billion a month in Treasury bonds and mortgage-backed securities until the labor market improves substantially, according to a report by USA Today. The purchases. launched last year, are intended to hold down long-term interest rates and have fueled the recent housing rebound and a blazing stock market rally.
The Fed, however, now expects a faster decline in the 7.6% unemployment rate — to 7.2% to 7.3% by year-end and to 6.5% to 6.8% by the end of 2014. In March, the Fed expected the jobless rate to be 6.7% to 7% by the end of 2014 and not to reach 6% to 6.5% before 2015.
The Fed’s view that the unemployment rate will fall faster than prior projections theoretically could lead to an earlier increase in the Fed’s benchmark short-term interest, now near zero. Fed policymakers have said they would not increase that rate — known as the fed funds rate — at least until the jobless rate falls to 6.5%, as long as the inflation outlook remains below 2.5%.
The first rate hike thus could happen as soon as 2014, rather than 2015 as previously expected. However, 14 of 19 Fed policymakers still don’t expect the first rate increase until 2015. The Fed has emphasized that a short-term rate increase would depend on other labor market data as well. For example, if the unemployment rate is falling because fewer Americans are working or looking for work, it could keep its short-term rate lower longer, especially if inflation is low.
Fed policymakers do expect lower inflation. They now project inflation of 1.2% to 1.3% this year, down from their March forecast of 1.5% to 1.6%. That could give the Fed more leeway to keep its easy-money policies going longer.