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Fed Keeps ‘Considerable Time’ Pledge as Growth Is ‘Moderate’

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The Federal Reserve maintained a commitment to keep interest rates near zero for a “considerable time” after asset purchases are completed, saying the economy is expanding at a moderate pace and inflation is below its goal.

“Labor market conditions improved somewhat further” while “significant underutilization of labor resources” remains, the Federal Open Market Committee said today in a statement in Washington. “Inflation has been running below the committee’s longer-run objective.” In July, the Fed said inflation was “somewhat closer” to its goal.

Policy makers tapered monthly bond buying to $15 billion in their seventh consecutive $10 billion cut, staying on course to end the program in October. Bond purchases intended to hold down long-term interest rates have swelled the Fed’s balance sheet to $4.42 trillion.

“They want to let the market know they are not ready to raise rates anytime soon,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “Inflation is buying them time to do nothing. Inflation is running below expectations so they don’t need to be engaged” in signaling tightening.

Rate Forecast

Even so, Fed officials raised their median estimate for the federal funds rate at the end of 2015 to 1.375 percent, compared with 1.125 percent in June.

The rate will be at 3.75 percent at the end of 2017, the Fed said today for the first time as it included that year in its Summary of Economic Projections. That is the same as Fed officials’ longer-run estimate. The median estimate in June for the long-run fed funds rate was also 3.75 percent.

Chair Janet Yellen and her Fed colleagues are debating how much longer to keep interest rates near zero as they get closer to their goals for full employment and stable prices. At the same time, they are considering a change in guidance on the outlook for borrowing costs to give them more flexibility to react to the latest economic data.

“The likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year,” according to the statement.

The personal consumption expenditures index, the central bank’s preferred price gauge, increased 1.6 percent in July from a year earlier and hasn’t exceeded the Fed’s 2 percent objective since March 2012.

Stocks rose after the Fed announcement, with the Standard & Poor’s 500 Index up 0.3 percent at 2,004.43 as of 2:22 p.m. in New York. Ten-year Treasuries yielded 2.58 percent, down 0.01 percentage point. Wide Range

The Fed repeated that it will consider a wide range of information in deciding when to raise the benchmark federal funds rate, which it has kept near zero since December 2008.

Bond purchases will be divided between $10 billion in Treasuries and $5 billion in mortgage-backed securities. The Fed also said it will maintain its policy of reinvesting maturing debt.

Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser dissented.

The Fed published new guidelines for its exit strategy, saying that the phaseout of reinvestment “will depend on how economic and financial conditions and the economic outlook evolve.”

FOMC participants said the main tool to move the federal funds rate will be changes in the interest rate it pays on excess reserves. Fed officials said reverse repurchase agreements will be used “as needed” to help control the fed funds rate and will phase out later.

Yellen is due to give a press conference scheduled at 2:30 p.m. today in Washington.

Main Rate

The Fed has said since March that its benchmark rate would stay low for a “considerable time” after it completes monthly bond buying intended to boost growth. With purchases coming to an end, officials started debating how much longer to keep the guidance.

The need for new language brought together policy makers who want to keep rates low with those who prefer to raise them sooner. Both sides said guidance should be tied to progress toward the Fed’s goals of full employment and price stability, rather than time periods.

Yellen signaled the need for more flexibility in an Aug. 22 speech at the Fed’s annual symposium in Jackson Hole, Wyoming.

Rates could rise sooner than expected, and further increases could be faster, if progress in labor markets “continues to be more rapid than anticipated,” she said. If progress toward the Fed’s goals disappoints, policy would stay accommodative for longer.

Job Gains

Labor-market gains have heartened Fed officials who argue for an earlier rate increase.

Unemployment in August fell to 6.1 percent, matching the lowest level since September 2008. While monthly payroll growth slowed to 142,000 in August, this year’s average gain of 215,000 puts the U.S. on pace to add 2.58 million jobs for the biggest annual growth in 15 years.

At the same time, broader measures point to areas of weakness. The share of the jobless who have been out of work for 27 weeks or longer stands at 31 percent, compared with an average of 19 percent from 2004 to 2007.

Improving economic data have spurred some Wall Street economists to pull forward their estimates for the first interest-rate increase. Ethan Harris, Bank of America Corp.’s co-head of global economics research, changed his forecast last week for the first increase in June from a prior estimate of September 2015. Economic Momentum

“Momentum going into the third quarter is solid,” said Aneta Markowska, chief U.S. economist at Societe Generale SA in New York. “Everything seems on track for another 3 percent or more GDP growth, and the labor market is still on a pretty solid trajectory.”

The world’s largest economy expanded at a 4.2 percent annual rate in the second quarter, after a 2.1 percent contraction in the first three months of this year that was the sharpest drop since before the recession ended in 2009.

In a reflection of an improving economic outlook, the two largest U.S. shipping companies said this week they will hire more seasonal holiday workers.

FedEx Corp. executives said today on a conference call they will hire more than 50,000 workers, compared with 40,000 last year, and that they see record volume growth in the holiday season. United Parcel Service Inc. said in a statement it expects it will need 90,000 to 95,000 workers, compared with an initial plan for 55,000 a year ago.

Inflation has remained contained even as growth picks up, giving the Fed room to continue unprecedented accommodation. A report today from the Labor Department showed that the consumer price index unexpectedly dropped in August for the first time in more than a year.

Adding to the Fed’s caution is concern that any move to signal an increase in interest rates risks sparking a market backlash that could endanger the five-year-old expansion.

Easy monetary policy and rising corporate profits lifted the Standard & Poor’s 500 Index to 33 record closes this year. The benchmark has almost tripled from a 12-year low in March 2009 and is up more than 8 percent this year.

Yields on the 10-year Treasury remain near their two-month high of 2.61 percent last week after rebounding from a one-year low of 2.34 percent reached on Aug. 28.

Volatility across stocks, bonds and currencies worldwide tumbled to record or multi-year lows this year. That suggests “some investors may underappreciate the potential for losses and volatility going forward,” Yellen said in a July 2 speech.

San Francisco Fed researchers came to a similar conclusion in a paper released Sept. 8. They said surveys, market expectations, and model estimates show the public may expect “a more accommodative policy” than FOMC participants.

–With assistance from Steve Matthews in Atlanta.

Check out Gundlach: Inflation Worries ‘5 Years Too Early’ on ThinkAdvisor.


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