May 23, 2013 in Business

Fed unsure of when to pull back on stimulus

Market retreats after minutes are released
Martin Crutsinger Associated Press
 

WASHINGTON – The Federal Reserve is torn on when to slow its aggressive efforts to stimulate the economy.

Its uncertainty burst into view Wednesday when Chairman Ben Bernanke testified to Congress in the morning and the Fed in the afternoon released the minutes of its last policy meeting.

Stock prices gyrated through the day as investors struggled to determine whether the Fed might soon pull back – even gradually – on its extraordinary efforts.

At one point, the Dow Jones industrial average had jumped more than 150 points after Bernanke’s testimony signaled his belief that it was too soon for the Fed to pull back on its support for the economy, including its $85 billion a month in Treasury and mortgage bond purchases.

But the Dow plunged and closed down 80 points after minutes from the Fed’s April 30-May 1 meeting showed that several members favored cutting the level of purchases, perhaps as early as June. Even that was hard to decipher because the minutes said members would have to agree that the economy had shown strong and sustained growth before the Fed would slow its bond purchases.

The Fed is buying the bonds to try to ease long-term borrowing costs, encourage borrowing and accelerate growth. And it’s said it will maintain its pace of bond purchases until the job market improves substantially.

Economists don’t expect the Fed to curtail the bond purchases next month. But Paul Ashworth, chief U.S. economist for Capital Economics, said the September meeting is a real possibility.

For one thing, Bernanke told lawmakers Wednesday that the Fed might reduce the purchases within the next few meetings if the job market showed “real and sustainable progress.” Bernanke is scheduled to hold a news conference after the September meeting, so Ashworth said it would allow him to directly explain the change then.

Still, whatever the Fed does is likely to be done gradually, Ashworth said.

“It could begin with a relatively trivial reduction to gauge market reaction,” he said.

Most of Bernanke’s testimony Wednesday to the Joint Economic Committee focused on the many risks the U.S. economy still faces and the help the Fed’s support programs have provided. His remarks suggested that the Fed isn’t ready to taper the bond purchases.

In recent weeks, the job market and the broader economy have shown renewed vigor. The unemployment rate has reached a four-year low of 7.5 percent. A resurgent housing market has helped lift consumer confidence. And a powerful stock market rally has made many consumers feel wealthier.

Unemployment does remain well above levels consistent with healthy economies. And some economic sectors like manufacturing are struggling. Bernanke also said higher taxes and deep federal spending cuts will likely slow growth this year.

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