The Federal Reserve said slack in the labor market persists even as the economy is picking up, and it continued to trim monthly asset purchases that have pumped up its balance sheet to a record $4.41 trillion.
“A range of labor-market indicators suggests that there remains significant underutilization of labor resources,” the Federal Open Market Committee said today in a statement in Washington. “The likelihood of inflation running persistently below 2 percent has diminished somewhat.”
Policy makers tapered monthly bond buying to $25 billion in their sixth consecutive $10-billion cut, staying on pace to end the purchase program in October.
Fed officials led by Chair Janet Yellen are stepping up a debate over when to raise interest rates for the first time since 2006 as unemployment falls faster than expected and inflation picks up toward their 2 percent goal.
The outlook brightened today with a government report showing the economy expanded more than forecast in the second quarter. At the same time, Yellen has expressed concern about persistent signs of labor-market slack, including low wages. The FOMC repeated it’s likely to reduce bond buying in “further measured steps” and to keep interest rates low for a “considerable time” after ending purchases.
“Inflation has moved somewhat closer to the committee’s longer-run objective,” the Fed said. Its preferred inflation gauge — the personal consumption expenditure price index — rose 1.8 percent in May from a year earlier. Its 12-month gain was as low as 0.8 percent in February.
“They are protecting their credibility” by flagging less risk that inflation will persist below their target, said Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “Inflation has moved from a reason for the Fed to be easier for longer to more of a neutral factor in policy.”
Stocks gained while bonds remained lower after release of the Fed announcement. The Standard & Poor’s 500 Index increased 0.1 percent to 1,971.75 at 2:38 p.m., while the yield on the 10- year Treasury note rose nine basis points to 2.55 percent.
Philadelphia Fed President Charles Plosser dissented, objecting that the guidance on the timing of a rate increase was “time dependent” and didn’t reflect “considerable economic progress.”
Bond purchases will be divided between $15 billion in Treasuries and $10 billion in mortgage-backed securities.
Since meeting in mid-June, the committee has come closer to achieving its goals for stable prices and full employment. Employers added 288,000 jobs last month, helping push down unemployment to 6.1 percent, the lowest in almost six years.