Fed keeps buying bonds, but sees economic risks easing

By Alister Bull and Pedro da Costa

WASHINGTON (Reuters) - The Federal Reserve on Wednesday said risks to the outlook for the U.S. economy and job market had eased since last fall, but it said it would keep buying $85 billion in bonds per month given the still-high level of unemployment.

Describing the economy as expanding moderately, Fed officials cited further improvement in the labor market and the housing sector, even as they noted that inflation was running below their 2 percent long-term goal.

In a statement after a two day meeting, the Fed's policy-setting panel offered a more upbeat assessment of the risks facing the economy than they had after they last met in May.

"The committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall," the Fed said.

U.S. stocks slipped, the dollar rose to session highs against both the yen and the euro, and U.S. rate futures fell as traders saw the statement as a small step toward an eventual reduction in the central bank's pace of bond buying.

"The statement contained a notable pat on the back, saying the downside risks to the outlook for the economy and the labor market have diminished since the fall, which is a necessary precursor if they are going to get to the point where they do start to taper," said Greg McBride, senior financial analyst at Bankrate.com in New York.

Kansas City Fed President Esther George again dissented against the Fed's expansion of its support for the economy, expressing concern it could fuel financial imbalances and hurt the central bank's goal of keeping inflation contained.

But in a surprise, St. Louis Fed chief James Bullard also dissented, arguing the Fed should signal more strongly its willingness to defend its 2 percent goal for inflation.

Fed Chairman Ben Bernanke will be questioned on the difference between tapering bond purchases and tightening monetary policy in a news conference at 2.30 p.m.

He will also likely face questions on his future after President Barack Obama hinted in an interview on Monday that the chairman was ready to step down at the end of his current term, on January 31, 2014.

RATE RISE NOT SEEN UNTIL 2015

The Fed has held overnight interest rates near zero since December 2008 while more than tripling its balance sheet to around $3.3 trillion with its bond buying.

In its current and third installment of so-called quantitative easing, it is purchasing $40 billion in mortgage-backed securities and $45 billion in longer-term U.S. government securities each month.

Economists expect rates to stay on hold until 2015, but the view in financial markets of the lift-off date had shifted forward since Fed Chairman Ben Bernanke fired up speculation last month that the central bank could soon curb its asset buying.

The Fed repeated on Wednesday that it will not lift interest rates until unemployment hits 6.5 percent or lower, provided that the outlook for inflation stays under 2.5 percent. The jobless rate was 7.6 percent in May.

In fresh quarterly projections, 14 of the 19 members of the Fed's policy-setting committee said they did not think it would be appropriate to raise rates until sometime in 2015.

Three officials saw 2014 as the year that rates would lift off from near zero, versus four policymakers back in March. One official continued to anticipate the first rate hike in 2016 and one in 2013.

In a sharp downgrade, the Fed forecast the PCE price index, its preferred gauge of the price pressures facing consumers, would rise just 0.8 to 1.2 percent this year. However, it saw the index heading back to 1.4 to 2.0 percent in 2014 and 1.6 to 2.0 percent in 2015. The Fed has a 2 percent inflation goal.

Furthermore, in a slight upgrade to their projections, officials forecast unemployment to average 6.5 to 6.8 percent in the fourth quarter of next year, and 5.8 to 6.2 percent in the final three months of 2015.

They forecast U.S. economic growth of between 3.0 and 3.5 percent next year and 2.9 to 3.6 percent in 2015.

Analysts think U.S. growth slowed a bit in the second quarter of this year in the face of fiscal drag from government spending cuts and higher taxes, and recent readings from the economy have been mixed.

The labor market, a central focus of Fed efforts to boost growth, has notched steady improvement with 175,000 new jobs added in May. But U.S. manufacturers have been hurt by softer overseas demand, and inflation has fallen even further beneath the Fed's goal.

The consumer price index was up 1.4 percent in May from a year ago. But the PCE price index rose just 0.7 percent in the 12 months through April, the most recent reading.

(Writing by Alister Bull; Additional reporting by Ann Saphir; Editing by Tim Ahmann and Andrea Ricci)

Source: http://news.yahoo.com/fed-seen-keeping-options-open-pace-bond-buying-050838496.html

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