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Originally published September 18, 2013 at 5:52 PM | Page modified September 19, 2013 at 6:51 AM

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Fed pulls surprise, keeps stimulus at full tilt

As congressional Republicans and the White House hurtle toward another showdown over federal spending, the Federal Reserve said it was concerned that fiscal policy once again “is restraining economic growth.”

The New York Times

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WASHINGTON — The Federal Reserve postponed any retreat from its long-running stimulus campaign Wednesday, saying it would continue to buy $85 billion a month in bonds to encourage job creation and economic growth.

As congressional Republicans and the White House hurtle toward another showdown over federal spending, the Fed said it was concerned that fiscal policy once again “is restraining economic growth,” threatening to undermine what the Fed had described just months ago as a recovery gaining strength.

The Fed’s decision surprised Wall Street, where there was nearly uniform consensus that the central bank would start to withdraw its economic stimulus this month.

Stock markets jumped after the 2 p.m. announcement, with the Standard & Poor’s 500 stock index touching a record high and the Dow Jones industrial average ahead more than 150 points.

But while the continuation of the stimulus program helps stock investors, the Fed’s apparent change of heart sowed confusion that is likely to last far beyond Wednesday in markets around the world.

Many on Wall Street were left wondering how they got it so wrong, with several pointing an accusing finger at Fed Chairman Ben Bernanke and the Fed’s communication strategy.

For his part, Bernanke appeared to put some of the blame on Wall Street, suggesting some investors were not paying sufficient attention to his previous statements.

The Fed’s decision may reflect the consequences of yet another premature retreat from its own policies. Mortgage rates have climbed and other conditions have tightened since the Fed signaled in June it intended to reduce its asset purchases by the end of the year, the Fed noted Wednesday.

“The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and the labor market,” it said in a statement after a regular two-day meeting of its policymaking committee.

The decision, an apparent victory for Bernanke and his allies who have argued for the benefits of asset purchases, was supported by all but one member of the Federal Open Market Committee. Esther George, president of the Federal Reserve Bank of Kansas City, dissented as she has at each previous meeting this year, citing concerns about inflation and financial stability.

The Fed may still begin to reduce asset purchases by the end of the year, consistent with its previous statements. It also refrained from any change in its stated intention to hold short-term interest rates near zero at least as long as the unemployment rate remains above 6.5 percent.

The statement said the committee sees recent economic data “as consistent with growing underlying strength in the broader economy.” However, the statement continued, “The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”

In their economic forecasts, also published Wednesday, Fed officials once again retreated from overly optimistic predictions about the pace of growth during the next several years.

The aggregation of forecasts by the 17 officials who participate in policymaking showed that Fed officials expect growth to remain sluggish for years to come, with persistent unemployment and little inflation, suggesting that the dismantling of the Fed’s stimulus campaign will remain slow and cautious.

The middle of the forecast range for economic growth this year was 2 to 2.3 percent, down from June predictions of growth between 2.3 and 2.6 percent. For 2013, Fed officials forecast growth between 2.9 and 3.1 percent, down from 3 to 3.5 percent in June.

Fed officials have emphasized that they expect the economy to improve in the coming months. Monetary policy seeps slowly through the economy, and they say they are increasingly convinced the economy will need less help.

“The time is approaching when our economy will have enough momentum on its own without the need for additional monetary stimulus,” John Williams, president of the Federal Reserve Bank of San Francisco, said earlier this month.

Proponents of aggressive asset purchases, including Bernanke, also face mounting pressure from internal critics who argue that the modest benefits of bond-buying are increasingly outweighed by the risk the Fed is encouraging excessive speculation or interfering with normal market function.

Despite their expectation for slower growth, the Fed’s economic forecasts Wednesday maintained their projections of a steady decline in the unemployment rate, although they still do not expect it to return to a normal level before 2017.

The Fed also continues to foresee little risk of excessive inflation.

Price increases are running at an annual pace of around 1 percent, near the lowest level on record. Officials predicted inflation would not rise as high as 2 percent — the Fed’s official target — until 2015, and that it would remain there in 2016.

Information about the market’s reaction to the Fed decision was provided by New York Times reporter Nathaniel Popper.

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