Federal Reserve: We Don’t Know How To Do Anything But Pump, Pump, Pump
September 19, 2013 by Sam Rolley
Despite widespread belief that the Federal Reserve would begin tapering off stimulus for the U.S. economy, the central bank announced Wednesday it will continue with $85 billion per month in bond purchase because it believes the economy still needs a crutch.
The central bank is set to continue purchasing agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month in order to “maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”
“Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” the Fed said in a statement.
The Federal Reserve also voted to keep short-term interest rates near zero until the jobless rate hits 6.5 percent or inflation rises above 2.5 percent.
The central bank also lowered its forecast for economic growth over the next year. It projects an increase in gross domestic product between 2 percent and 2.3 percent this year, down from 2.3 percent to 2.6 percent. For unemployment, the Fed expects a rate of 7.1 percent to 7.3 percent this year, falling to between 6.4 percent and 6.8 percent next year.
The Federal Reserve’s holdings of government debt have surpassed $2.8 trillion.
Following the central bank announcements Wednesday, both the Dow Jones industrial average and the Standard & Poor’s 500 index jumped to record highs, while the dollar fell to a seven-month low against the euro. The news also caused gold prices to rally, leading some gold watchers to say the precious metal has a chance to target $1,400 an ounce in coming months.
As the Fed continues to dally on changing its long-standing easy money economic policy, it remains unclear who will succeed current Chairman Ben Bernanke when his term ends in January. Lawrence Summers, who was considered the leading candidate, withdrew from his name from consideration following resistance from critics. The current frontrunner is Fed member Janet Yellen.