Fed stands by stimulus, sees stronger US economy
WASHINGTON – The Federal Reserve said Wednesday that the U.S. economy has strengthened after pausing late last year but still needs the Fed’s extraordinary support to help lower high unemployment.
In a statement after a two-day meeting, the Fed stood by its plan to keep short-term interest rates at record lows at least until unemployment falls to 6.5 percent, as long as the inflation outlook remains mild. And it said it would continue buying $85 billion a month in bonds indefinitely to keep long-term borrowing costs down.
Speaking at a news conference, Chairman Ben Bernanke stressed that while the economy has improved, the Fed won’t ease its aggressive stimulus policies until it’s convinced the economic gains can be sustained. An unemployment rate of 6.5 percent is a “threshold, not a trigger for any rate increase, he said.
Bernanke also said the Fed might vary the size of its monthly bond purchases depending on whether or how much the job market improves.
The unemployment rate has fallen to a four-year low of 7.7 percent, among many signs of a healthier economy.
“We are seeing improvement,” Bernanke said. “One thing we would need is to see this is not temporary improvement.”
Investors seemed pleased with the Fed’s decision to maintain its low-interest rate policies and with Bernanke’s remarks. The Dow Jones industrial average was up about 57 points about 90 minutes after the statement was released at 2 p.m. EDT, up slightly from just before. The Standard & Poor’s 500 stock index also added to its gains on the day.
The Fed’s statement took note of the global stresses that have been intensified by the turmoil in Cyprus, which is trying to stave off financial ruin. No longer does the Fed statement say, as it did in December, that “strains in global financial markets have eased somewhat.”
Bernanke was asked at his news conference whether the flare-up in Cyprus signals that the U.S. financial system might be more vulnerable than bank “stress tests” have shown. He sought to downplay the dangers posed by the tiny Mediterranean nation. Bernanke said that “at this point,” he sees no major risks to the U.S. financial system or economy.
The Fed noted in its statement that the U.S. job market has improved, consumer spending and business investment have increased and the housing market has strengthened. But its latest economic forecasts, also released Wednesday, show that the Fed still doesn’t expect unemployment to reach 6.5 percent until 2015.