Fed Keeps $85 Billion QE Pace Looking For Stronger Growth

The Federal Reserve decided to press on with $85 billion in monthly bond purchases, saying it needs to see more evidence that the economy will continue to improve.

'The recovery in the housing sector slowed somewhat in recent months,' the Federal Open Market Committee (FDTR) said today at the end of a two-day meeting in Washington. 'Fiscal policy is restraining economic growth.'

Ben S. Bernanke is pushing unprecedented accommodation into the final months of his Fed chairmanship as he seeks to shield the four-year economic expansion from the impact of higher borrowing costs and this month's partial U.S. government shutdown. The 16-day closing resulted in the furloughs of as many as 800,000 federal workers and delayed release of data the Fed says it needs to evaluate the economy.

'Taking into account the extent of federal fiscal retrenchment over the past year, the committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy,' the committee said. The Fed repeated that it will 'await more evidence that progress will be sustained before adjusting the pace of its purchases.'

The Fed's purchases will remain divided between $40 billion a month of mortgage bonds and $45 billion in Treasury securities.

'Wait-and-see seems to be the prescription for the day,' said Scott Anderson, chief economist at Bank of the West in San Francisco. 'They're on hold given that the data haven't moved in their direction,' said Anderson, who predicts the Fed won't make its first cut to bond buying until March.

Target Rate

The central bank left unchanged its statement that it will probably hold its target interest rate near zero 'at least as long as' unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent.

The Standard & Poor's 500 Index fell 0.8 percent to 1,758.67 at 2:25 p.m. in New York, while the yield on the benchmark 10-year Treasury (USGG10YR) note increased 0.03 percentage point to 2.53 percent.

The Fed repeated that inflation 'has been running below the committee's longer-run objective but longer term inflation expectations have remained stable.'

Price gains have lagged below the committee's 2 percent long-run target. The cost of living rose as projected in September as fuel charges climbed, capping the smallest year-to-year gain in five months.

Preferred Gauge

The consumer price index increased 0.2 percent after rising 0.1 percent the prior month, a Labor Department report showed today. The Fed's preferred gauge of inflation, the personal consumption expenditures index, rose 1.2 percent in August and hasn't breached 2 percent since March 2012.

The Fed removed a sentence from the previous statement that had said tighter financial conditions could slow the improvement in the economy.

Kansas City Fed President Esther George dissented for the seventh meeting in a row, citing the risk the Fed's stimulus could create financial imbalances and cause long-term inflation expectations to rise.

Economists forecast no change to the Fed's bond buying today. The FOMC won't reduce the pace of purchases until its March 18-19 meeting, according to the median estimate of an Oct. 17-18 Bloomberg News survey.

Dialing Down

President Barack Obama has nominated Vice Chairman Janet Yellen to succeed Bernanke, whose term expires on Jan. 31. If confirmed by the U.S. Senate, Yellen would take on the challenge of dialing down so-called quantitative easing and withdrawing stimulus while maintaining growth.

Central bankers are waiting to see how the economy weathered the budget impasse and debt-limit debate earlier this month. The shutdown reduced growth by 0.3 percentage point this quarter, according to the median estimate in an Oct. 17-18 Bloomberg survey, as businesses from Capitol Hill eateries to Florida Everglades charter boats lost customers while workers were furloughed and national parks were closed.

Some data measuring the strength of the economy in the months before the shutdown still hasn't been released, and delays to other reports may distort the figures, according to economists. A report on economic growth in the third quarter, originally scheduled for release today, was postponed until Nov. 7.

'The quality of the data may be suspect because of disruption to the normal survey routines,' said Dana Saporta, a director of U.S. economics research at Credit Suisse Group AG in New York.

'Look Back'

'When we look back on this quarter in the future, we might not see much evidence of the government shutdown in the aggregate data,' she said. 'But we don't know that, and it will be several weeks before we can analyze the impact of the shutdown and debt-ceiling debate.'

Some private reports and delayed government indicators for September showed the economy was having trouble accelerating prior to the shutdown.

Employers in the U.S. added 148,000 jobs last month, down from 193,000 in August. Factory output rose less than forecast, and existing-home sales fell for the first time in three months as rising prices and mortgage rates damped demand.

At the same time, American consumers kept spending on most types of goods last month, a Commerce Department report showed yesterday. Sales at retailers excluding auto dealers rose 0.4 percent after a 0.1 percent increase the prior month.

The government shutdown took a toll on consumer and business confidence in October, recent reports suggest. The Bloomberg Consumer Comfort (COMFCOMF) Index sank to the lowest level in eight months in the week ended Oct. 20.

Fewer Workers

Companies this month added fewer workers than projected, a private report based on payrolls showed today. The 130,000 increase was the smallest in six months and followed a revised 145,000 gain in September that was weaker than initially estimated, according to the ADP Research Institute in Roseland, New Jersey.

The monthly figures are the first to show how employment fared during the government suspension. Limited employment and wage gains, along with the prospect of another fiscal battle early next year, raise the risk of restrained retail sales during the holidays.

Still, gains in stock prices and home values are shoring up household balance sheets. Equities have rallied, pushing the S&P 500 Index (SPX) to records, on rising corporate profits and expectations that the Fed will maintain stimulus.

Beating Estimates

General Electric Co. is among companies beating analyst estimates. GE, the conglomerate that is the world's largest maker of jet engines and diesel locomotives, said Oct. 18 that profit margins on its industrial businesses grew 1.2 percentage points as orders climbed in China, sub-Saharan Africa and Russia.

'Our third-quarter results were very strong in an improving global business environment,' Chief Executive Officer Jeffrey Immelt said in a statement. 'Our industrial strength was broad-based.'

The Fed unexpectedly refrained from tapering at its meeting last month, seeking more evidence the economy is strengthening. Economists surveyed by Bloomberg before the gathering predicted the Fed would begin reducing the pace of purchases.

Fed Governors Jerome Powell and Jeremy Stein both characterized the September decision as a 'close call.' The Fed cited the risk that higher interest rates could slow the economy.

Rate Fell

Borrowing costs have since declined. The yield on the 10-year Treasury note fell to 2.49 percent late yesterday from as high as 3.01 percent on Sept. 5. The average 30-year mortgage rate fell to 4.13 percent last week from as high as 4.58 percent in August.

'There are some question marks about growth in the U.S. economy,' said Nathan Sheets, the global head of international economics at Citigroup Inc. in New York and a former top economist at the Fed board. 'The Fed is inclined to watch and wait until they're comfortable that we've seen a meaningful rebound.'

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net Jeff Kearns in Washington at jkearns3@bloomberg.net;

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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