Industryweek 6617 Janetyellen

Federal Reserve Continues to Whittle Away at Stimulus Program

April 30, 2014
FOMC ordered $10 billion cut from bond-buying program. Benchmark federal funds rate left untouched. Policy statement says economic activity "has picked up recently."

WASHINGTON - The U.S. economy nearly froze in the glacial first quarter, but emerging signs of vigor kept the Federal Reserve on its stimulus taper track Wednesday.

The Fed shrugged off the shockingly weak 0.1% annual growth rate of the past quarter reported earlier in the day by the Commerce Department.

The Federal Open Market Committee, led by Fed Chair Janet Yellen, concluded after a two-day meeting that the economy remains in fairly good shape, able to handle the ongoing cutback in its bond-buying stimulus program, but still in need of a near-zero interest rate.

Economic activity "has picked up recently after having slowed sharply during the winter in part because of adverse weather conditions," the FOMC said in its policy statement.

The first-quarter slowdown from a 2.6% expansion in the fourth quarter of 2013 was much worse than analysts expected; the average estimate was for a 1% pace.

But this was a rear-view mirror look at the economy, and for the Fed, most of the recent signposts were pointing to "moderate" growth and a gradual improvement in the jobs market.

As widely expected, the FOMC ordered another $10 billion cut in its bond-buying program, which has aimed at holding down long-term interest rates to encourage hiring and investment.

That took the quantitative-easing program to $45 billion a month, beginning in May, down from $85 billion in December, when the stimulus taper was launched.

But it left the benchmark federal funds rate between zero and 0.25% -- where it has been since the end of 2008 -- noting inflation is restrained while unemployment "remains elevated."

"The Fed has been largely correct that the weakness we saw earlier this year would be temporary. Already, we've seen rebounds in retail sales, motor vehicle sales, business capital spending, and payroll employment in March," said Paul Edelstein of IHS Global Insight.

Restrained Market Impact

The FOMC statement, little changed from March, did not have any significant impact on stocks, bonds or the dollar, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange.

Still, the Dow Jones Industrial Average closed Wednesday at a record high for the first time in 2014, gaining 0.27% at 16,580.84.

Growth in the first quarter was the slowest since late 2012. The world's largest economy has been losing steam for some time, with full-year GDP growth slowing to 1.9% in 2013 from 2.8% in 2012.

Commonwealth's Esiner said the recent improvements in the U.S. economy should keep the Fed on track to wind down its asset-purchase program around the end of this year. Investors currently expect the Fed to begin lifting borrowing costs around the middle of 2015, he said.

"The largely benign Fed announcement today keeps the market's focus squarely on Friday's payrolls report for April," he said.

Copyright Agence France-Presse, 2014

Popular Sponsored Recommendations

Voice your opinion!

To join the conversation, and become an exclusive member of IndustryWeek, create an account today!