The Federal Reserve yesterday left its $85 billion a month stimulus programme in place, against broad expectations that it would reduce it as the economy grows.
Fed policy makers instead cut their growth forecast for this year and next, suggesting the economy is feeling the impact of Government spending cuts and continues to struggle to break free from the Great Recession.
The Federal Open Market Committee (FOMC) said that although the economy appears to be holding up amid Government “sequester” spending cuts, it “decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”
In addition, it pointed to the impact of a sharp rise in interest rates since May as possibly already slowing the economy.
“The committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall,” it said in a statement at the end of a two-day monetary policy meeting.
“But the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.”
The Fed had been widely expected to begin reducing the bond-purchase programme, aimed at pulling down long-term interest rates, after Fed Chairman Ben Bernanke predicted in May that the stimulus operation could be tapered late this year.
For most analysts, the debate was only over how much the quantitative easing (QE) bond purchases would be cut — with the guesses from $ 5 billion a month to $ 25 billion a month.
But the FOMC decision was not a departure from what Bernanke has stated publicly. He has consistently said the taper of the QE programme could begin sometime late this year, if the economy continued to gain broadly.
The FOMC acknowledged that the economy is still expanding “at a moderate pace,” and that labor market conditions — a central focus of current Fed policy — have improved in recent months.
However, it noted, the jobless rate at 7.3 per cent in August “remains elevated.”