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Continued: Minutes: Many Fed members want to see further job gains before slowing bond purchases

  • Article by: CHRISTOPHER S. RUGABER , AP Economics Writers
  • Last update: July 10, 2013 - 5:25 PM

Bernanke stressed at the news conference last month that if the economy weakens, the Fed wouldn't hesitate to step up its bond purchases again. Still, stocks and bonds plunged after his remarks, and interest rates surged.

Several Fed members helped steady stock markets in the days that followed by noting that any pullback in bond buying would hinge on the economy's health, not a target date. Stocks have since regained most of their losses, in part because of encouraging data about the job market and corporate earnings.

Ultra-low rates have encouraged more Americans to buy homes and cars, helped support the economy and cheered the stock market. Investors worried that once the Fed starts scaling back its bond buying, home loans would start to cost more, corporations would pay more to borrow and bond investors would be squeezed.

But steady job gains have raised the likelihood that the Fed will announce after its September meeting that it's reducing its bond purchases.

Still, economic growth has been subpar. The economy grew at an annual rate of just 1.8 percent in the January-March quarter. Economists think growth stayed below a 2 percent annual rate in the April-June quarter. If so, it would mark a third straight quarter of weak growth.

Most think growth will pick up in the second half of the year but stay around 2 percent for the year.

The Fed's forecasts are rosier: It predicts growth of 2.3 percent to 2.6 percent this year and more than 3 percent in 2014. It also expects unemployment to fall as low as 7.2 percent by the end of this year and as low as 6.5 percent by the end of 2014.

Many analysts think the Fed could begin slowing its bond purchases from $85 billion a month to around $65 billion in September and gradually shrink them before ending them by next summer. That would likely happen, though, only if the job market and the economy continued to strengthen. Bernanke has said the bond-buying would end when the unemployment rate would be around 7 percent. It's now 7.6 percent.

But even when it curtails the purchases, the Fed will continue to provide support for the economy. For one thing, it plans to keep its investment holdings constant to avoid causing long-term rates to rise too quickly. It also plans to keep short-term rates at record lows at least until unemployment slides to 6.5 percent.

And Bernanke has said 6.5 percent unemployment is a threshold, not a trigger: The Fed might decide to keep its benchmark short-term rate near zero even after unemployment falls that low.

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