The Federal Reserve said growth is bouncing back and the job market is improving as it continued to reduce the monthly pace of asset purchases.
“Economic activity is rebounding in the current quarter and will continue to expand at a moderate pace thereafter,” Federal Reserve Chair Janet Yellen said at a press conference in Washington today following a meeting of the Federal Open Market Committee. Even with declines in unemployment, “a broader assessment of indicators suggests that underutilization in the labor market remains significant.”
The FOMC trimmed bond-buying by $10 billion for a fifth straight meeting, to $35 billion, keeping it on pace to end the program late this year.
Yellen and her fellow policy makers are debating how long to keep interest rates near zero as the U.S. labor market improves and inflation moves closer to the Fed’s 2% goal.
The policy-making FOMC repeated today that it’s likely to “reduce the pace of asset purchases in further measured steps” and that it expects rates to stay low for a “considerable time” after the bond-buying ends.
Updating their economic forecasts, Fed officials predicted their target interest rate will be 1.13% at the end of 2015 and 2.5% a year later, higher than previously forecast. They lowered their long-run estimated rate to 3.75% from 4%, reflecting slower long-term growth for the U.S. economy. Fed participants estimated long-term growth at 2.1% to 2.3%, compared with 2.2% to 2.3% in March.
“Inflation has continued to run below the committee’s 2% objective,” Yellen said, and low inflation “could pose risks to economic performance.” At the same time, longer-term expectations are still “well-anchored.”
The personal consumption expenditures index, the Fed’s preferred inflation gauge, rose 1.6% from a year earlier in April, the most since November 2012. The consumer price index, a separate inflation measure, rose 2.1% in May.
The Fed will divide its bond purchases between $20 billion in Treasuries and $15 billion in mortgage-backed securities beginning in July, the FOMC said in its statement.
Yellen said policy makers are discussing a new set of principles to guide an eventual exit from record easing and expects to announce them later this year.
“The committee is confident it has the tools it needs to raise short-term interest rates” when necessary, she said. The Fed “will continue to have a very large balance sheet for some time.”
Three rounds of large-scale asset purchases intended to hold down long-term interest rates have swelled the central bank’s balance sheet to a record $4.34 trillion. Fed officials are testing tools that will be needed to tie up excess reserves in the banking system, a step they will have to take in order to raise short-term rates.
Steady labor-market gains have bolstered confidence among policy makers that they can wind down asset-buying without endangering the five-year expansion.