The Federal Reserve will continue to support the U.S. economy with ultra-low interest rates and $85 billion a month in asset purchases on an open-ended basis, the central bank announced Wednesday.
Policy makers are betting the benefits from the program outweigh any risk of inflation. The Fed pledged not to back off until unemployment drops to 6.5 percent or lower.
The Fed acknowledged that job growth has accelerated in recent months, but cautioned that the unemployment rate remains unacceptably high at 7.8 percent.
Their decision to maintain its aggressive bond-buying program came as no surprise to economists, particularly in light of this morning’s GDP report that showed a surprise drop in U.S. economic activity in the fourth quarter of 2012.
The economy shrank 0.1 percent in the final three months of the year, according to the Commerce Department. Most estimates called for growth of 1 percent.
While analysts say the decline was due in large part to government spending cuts and concerns about the fiscal cliff crisis, the Fed signaled it will take no chances with the fragile recovery.
Whatever the cause of the fourth quarter slowdown, the economy is primed to snap back in the first quarter of 2013 — the housing market is heating up, and today’s ADP report showed that the private sector created 192,000 new jobs in January.
For its part, the Fed said that economic activity has “paused in recent months” due to weather and other transitory factors. The decision to continue with asset purchases was not unanimous. New voting member Esther George of the Kansas City Fed worried that the highly accommodative policy risks runaway inflation.
Four new voting members rotate into the Federal Open Market Committee and four are replaced each year.
The new voters are unlikely to significantly alter the direction of Fed policy — Charles Evans of the Chicago Fed and Eric Rosengren of Boston are advocates ultra-easy policy, while George replaces Richmond Fed President Richard Lacker as the board’s hawkish voice.
The minutes of meeting will be released on February 20.
by RTT Staff Writer
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