Ending a two-day meeting, the Fed made no changes to the program. The decision was unanimous. The bond purchases were intended to lower loan rates, encouraging spending and boost stock prices. But critics worried that the purchases would feed inflation.
The Fed downplayed inflation risks. It acknowledged a spike in oil prices, but concluded that the pickup in inflation will be temporary.
Fed Chairman Ben Bernanke spoke at a historic news conference after the meeting. It was the first time in the Fed’s 98-year history that a chairman has begun holding regular sessions with reporters.
Bernanke said Fed officials expect the moderate economic recovery to continue after weak growth in the first three months of the year.
Before he spoke, the Fed offered its latest economic projections for the year. The economy will grow between 3.1 percent and 3.3 percent this year. That’s downward revision from their last forecast, which saw growth possibly as high as 3.9 percent this year. The new forecast reflects the fact the economy slowed in the first three months of this year because of higher energy costs.
But the Fed is more optimistic about unemployment than it was in January. The unemployment rate, which stood at 9.8 percent in November, has fallen to a two-year low of 8.8 percent. The Fed’s new forecast projects unemployment will fall to between 8.4 percent and 8.7 percent by the end of the year.
As it winds down its economic support programs, the Fed is shifting its focus on when and how it should start boosting interest rates to prevent inflation from getting out of control. Economists think the Fed will start raising rates later this year or early next year. Higher rates would reduce borrowing and spending and make companies less inclined to boost prices.
To nurture the recovery, the Fed also kept a pledge to hold its key interest rate at a record low near zero for an “extended period.” The Fed has kept rates at ultra-low levels since December 2008.
Even though the program, which consists of buying $600 billion in Treasury bonds, is scheduled to end in June, the Fed said it’s continuing a separate support program: It’s reinvesting about $17 billion a month in proceeds from its portfolio of mortgage securities to buy Treasury debt. That should help keep rates low on mortgages and other consumer loans.
Since the Fed’s bond-purchase program was announced in early November, the economy has gained strength. The unemployment rate has dropped to 8.8 percent, a full percentage point. Companies have added more than 200,000 jobs for two straight months — the first time that’s happened in five years. And the S&P 500 index has surged 28 percent over the past eight months. Rates on 30-year mortgages have dropped and now stand at 4.80 percent.
The news conferences are part of a long-standing effort by Bernanke to make the Fed, an independent government agency, more transparent. They also allow him to steer a debate about hiring, growth and inflation and to cast himself as open and accessible. He can have his voice heard above a vocal minority of Fed officials who are concerned about rising inflation.
Those officials, including the Fed regional chiefs in Philadelphia and Minneapolis, say the Fed may need to raise interest rates by the end of this year to fight inflation. The central bank has kept its benchmark interest rate near zero since December 2008.
Richard Fisher, president of the Federal Reserve Bank of Dallas, has argued that the Fed should consider halting the bond-buying program now, not in June.
The majority — including Bernanke, vice chairwoman Janet Yellen and William Dudley, president of the Federal Reserve Bank of New York — say interest rates should stay low longer, and the bond-buying program should run its course.
Bernanke has predicted that the jump in oil and food prices will cause only a brief increase in consumer inflation. Excluding those prices, which tend to fluctuate, inflation is still low, he has argued.
So far this year, Bernanke has managed to forge consensus for his policies. All the Fed’s decisions this year have been unanimous. But the deepening divides could make Bernanke’s job harder.