Fed offers clarity, sort of, as bond buying ends

The Federal Reserve Wednesday announced it would trim its bond buying by another $10 billion, leaving it on course to end next month the controversial program designed to support the sluggish U. S. economic recovery.

The Fed has been tapering off its purchases this year with each successive meeting of the rate-setting Federal Open Market Committee, and as of Wednesday will be purchasing just $15 billion starting in October.

“If incoming information broadly supports the committee’s expectation … the committee will end this program at our next meeting,” said Fed Chair Janet Yellen, at the start of a news conference.

Two FOMC members_ Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser_ voted against the statement, each voicing concern that stronger economic growth may spark inflation that’d force the Fed to begin raising interest rates more quickly than many anticipate.

“We do have a range of views in the committee, I don’t consider two dissents to be an abnormally large number,” Yellen said. “Presidents Fisher and Plosser have been quite clear … that they think the time has come to begin normalizing policy.”

The Fed chief herself didn’t anticipate an overheating scenario, noting repeatedly in her news conference that there is plenty of slack still in the job market and the economy is not near full employment.

“There is significant underutilization of labor resources,” Yellen said, suggesting that wages will remain flat as the job market is nowhere near tight and workers can’t demand higher pay. She added that there is debate over whether the unemployment rate today is an adequate gauge of workforce health.

The close Wednesday of the Fed’s two-day meeting also offered an update to the economic projections of Federal Reserve board members and bank presidents. The September forecast is a touch softer on economic growth, with the central tendency of members being within a range of 2 percent to 2.2 percent for 2014 and 2.6 percent to 3 percent in 2015. In June, members saw 2014 growth in a range between 2.1 percent and 2.3 percent and between 3 percent and 3.2 percent next year.

On the labor front, the September forecast sees 2014 closing with an unemployment rate between 5.9 percent and 6 percent, a slight improvement over the June projection of a range between 6 percent and 6.1 percent. The national jobless rate stood at 6.1 percent in August.

Yellen’s announcement to end bond buying was hardly a surprise as economists long expected the effort_ called quantitative easing, or QE_ to end at the late October meeting.

But the end of the bond buying means the start of a very uncertain path.

For the past two years, the Fed’s purchase of trillions of dollars in mortgage and government bonds helped juice financial markets and keep long-term lending rates unusually low for consumers and businesses. When the program ends, some fear a spark in inflation and a related sharper-than-expected rise in lending rates, which could stunt an already sluggish recovery.

To that end, Yellen and Fed colleagues Wednesday released a statement on Policy Normalization Principles and Plans, which the Fed chief insisted does not signal a change” in current or future policy. The Fed is worried that after five years of a near-zero benchmark lending rate, financial markets and ordinary Americans may find it unsettling to return to a more volatile lending-rate environment. The statement was designed to spell out the expected path for a return to past normalcy.

That policy statement also answered one question that economists have long speculated about, how the Fed will seek to influence rate increases. Yellen said the Fed hopes to influence this rate by adjusting the rate its pays private banks on excess reserves parked at the Fed’s district banks.

The Fed will, in a gradual and predictable manner, cease to reinvest earnings from its bond holdings and actually shed its holdings, Yellen said. For the first time, Yellen put a timetable on the reduction of assets the Fed holds, saying “it could take to the end of the decade to achieve those levels.”

But the Fed chair cautioned that mortgage bonds won’t be sold off anytime soon, suggesting the Fed feels the weak housing market is still in need of as much help as it can get.

Yellen punted on comment about a timely sensitive issue worrying financial markets, Thursday’s vote in Scotland on whether to separate from the United Kingdom.

“I wouldn’t want to weigh in on this today,” Yellen said, noting only that “they’ve had a good debate.”