Federal Reserve holds course in face of rising inflation fears; Ben Bernanke to explain actions at first-ever news conference [Updated]
Federal Reserve policymakers said Wednesday that they will stay the course, for now, in supporting the still-vulnerable economic recovery with monetary stimulus and rock-bottom interest rates -- even as rising inflation fuels more concerns around the globe and inside the central bank.
The unanimous decision by the Fed's policy-making committee to let its controversial $600-billion Treasury-bond-buying effort run its course and to maintain key short-term interest rates near zero for the foreseeable future was widely expected by analysts and investors on Wall Street.
But the committee, in its statement, made note of the recent pickup in inflation. It gave no indication of taking further steps to pump large additional sums into the financial system to spur growth after the bond-purchase program ended in June as scheduled. And that could mark the beginning of a risk-filled, politically charged shift for the Fed, from a period of easing credit to one of tightening.
The Fed’s statement gave a moderate boost to the stock market. The Dow Jones industrial average, which had been up about 15 points before the release, rose about 30 points more afterward. The blue-chip index was trading at about 12,638 half an hour after the announcement, up 43 points from Tuesday’s close.
In the statement, which will frame Chairman Ben S. Bernanke’s exchange with journalists later Wednesday (streaming live), the Fed gave a more upbeat assessment of the economy. They said the “recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually.” But officials also noted that unemployment (8.8% in March) remained elevated and that the housing market was still depressed.
On inflation, the statement acknowledged that spikes in energy and other commodity prices had pushed up inflation, but “the committee expects these effects to be transitory.” Some Fed members and outside economists, however, have questioned whether the effects will in fact prove to be temporary.
The statement, following a two-day meeting, was released nearly two hours earlier than in the past as the U.S. central bank marked a major internal policy shift of its own. For the first time in its nearly century-old history, a Fed chief Wednesday will hold a press conference and answer questions about the bank’s decisions at the conclusion of its monetary policy meeting.
The session with reporters marks a dramatic change for the traditionally secretive institution and has raised some suspense on Wall Street. Bernanke is likely to be pressed to defend the Fed’s bond-buying strategy and explain how he will address the tough economic and political challenge of trying to control inflation while also fulfilling its other mandate of maximizing employment.
Experts don’t expect Bernanke to depart from scripted statements he’s made in the past, or to say anything that might surprise financial markets. The chairman is said to have carefully reviewed tapes of other central bankers’ dealings in similar events, and Bernanke has considerable experience answering tough questions from lawmakers.
At the same time, he could shed more light on the thinking behind the Fed’s decisions and give additional guidance on what it would take for policymakers to move one way or another at this uncertain juncture in the recovery.
Stocks have risen sharply this year as corporate profits have soared, thanks largely to deep cost-cutting and stronger exports, but many people remain concerned about the nation’s high joblessness, sharp increases in oil and other commodity prices, and the effects of the disaster in Japan and Europe’s debt woes.
[Updated at 11:15 a.m.: As expected, Fed officials on Wednesday sharply lowered their forecast for economic growth this year, reflecting the effects of higher oil prices, harsh winter conditions and a worsening of the nation's trade balance.
Most policymakers now see gross domestic product, or total economic output, growing between 3.1% and 3.3% in 2011 -- down from the 3.4% to 3.9% projected in January.
The inflation picture also looks worse. Overall consumer prices are now seen as rising from 2.1% to 2.8% this year, whereas the Fed previously forecast inflation to grow by no more than 1.7%. Excluding energy and food, the Fed projected slightly higher inflation of 1.3% to 1.6% this year.
At the same time, the unexpectedly sharp fall in the jobless rate in recent months prompted the Fed to give a slightly more favorable outlook for the labor market. The unemployment rate is now seen as falling to as low as 8.4% this year, compared with the 8.8% projected in January.]
The Commerce Department is expected to report Thursday that the U.S. economy grew at an anemic annual pace of less than 2% in the first quarter, mostly because of a fall in net exports and the sapping effects of higher fuel costs. But most economists are projecting stronger growth for the rest of the year, with employment continuing to show decent gains and consumer spending also edging higher.
But a lot rides on how the Fed acts. If it moves too soon in tightening credit to avoid a potentially dangerous surge of inflation, it could have severe consequences for the economy. Waiting too long carries similarly big risks.
-- Don Lee
Photo: The Federal Reserve in Washington. Credit: Associated Press