Seeing continued expansion of the U.S. economy, the Federal Reserve has scaled back its monthly asset purchases by another $10 billion, to $65 billion.
In its policy statement, the Fed acknowledged further healing in the job market, despite the December employment report showing that 74,000 jobs were created, fewer than forecast. At the same time, the unemployment rate dropped to 6.7 percent.
The central bank's policy committee said it "continues to see the improvement in economic activity and labor market conditions ... as consistent with growing underlying strength in the broader economy." With that justification, it will reduce its purchases of mortgage bonds and Treasury notes by another $10 billion a month, starting in February.
Key rate remains near zero percent
The Fed reiterated its promise that the benchmark federal funds rate will be kept near zero percent "well past the time that the unemployment rate declines below 6.5 percent." While looking to foster further improvement in the job market, the Fed also is concerned that inflation is too low.
The announcement followed two days of policy meetings, the last in which Ben Bernanke served as chairman of the Federal Reserve. Janet Yellen succeeds Bernanke later this week, having previously served as vice chairman.
Steadily cutting bond purchases
Bernanke had announced in December that asset purchases would be reduced for the first time beginning this month. At his news conference, Bernanke said he expected there would be further reductions in measured or virtually equal steps as the year proceeds. He also cautioned that changes in policy would be "data-dependent," meaning that if conditions changed, the Fed would be ready to adjust as needed.
Whole lotta rosy
In its economic projections, the Fed has said that the nation's unemployment rate could go as low as 6.3 percent later this year. But Lindsey Piegza, chief economist with Sterne Agee, says the Fed "consistently has a rosier forecast than what the data actually shows." She says the risk remains that the economy will underperform this year, noting that many newly created jobs pay relatively low wages, dampening consumer spending.
Thursday morning, the Commerce Department is scheduled to release its first estimate of growth for the fourth quarter of 2013. Economists expect it to reflect an annual growth rate of around 3 percent, following a 4.1 percent annual growth rate in gross domestic product in the previous three months.
The Fed continues to lower the dosage
Ben Bernanke's last meeting as Federal Reserve chief has few surprises except for the harmony among policymakers.
LISTEN TO AUDIO
From Bankrate.com, this is "Special Report." The Federal Reserve's first meeting of 2014.
Hello, I'm Mark Hamrick, Washington Bureau Chief for Bankrate.
Federal Reserve meetings typically provide an opportunity for us to take stock of where the economy is at the moment, particularly as viewed by the nation's central bankers.
While benchmark interest rates, those set by the Fed, are thought to be locked in place for at least a year to come, there is some fine-tuning involving monetary policy that affects us. We're going to talk about what happened with this latest meeting, and what might lie ahead.
And we also note that this is the final meeting chaired by Ben Bernanke.
We're joined by Bankrate's chief financial analyst, Greg McBride.
All of that and more coming up on Special Report.
Mark Hamrick: Greg McBride, the Federal Reserve has decided to draw down asset purchases once again, and what might be most remarkable about this is that Chairman Bernanke essentially told us that this was going to happen in the month of December, so is the Fed just feeling sufficiently -- I'm going to use the word -- comfortable with where the economy is, to go ahead on down this path?
Greg McBride: I think this is the right move. If you are the Fed and you let one lousy unemployment report, which may end up being an anomaly, and what amounts to a 4 percent pull-back in the stock market from a record high distract you from the very modest pace of tapering their bond purchases -- I think it sends absolutely the wrong signal. It sends panic through the markets. They start to wonder what the Fed knows that they do not, or it just undermines the Fed's credibility altogether, which you do not want at the time when you are changing who is at the chair of the Fed. I think this was the prudent move, particularly because this tapering -- this knocking another $10 billion a month off of bond purchases -- is still a very modest stepping-down.
Mark Hamrick: And Greg, I think it's also notable that the Fed, as you noted there, decided not to reference some of what we might call hiccups in the economy, but in the very beginning of the statement talks about growth and economic activity picking up in recent quarters. So, it seems as if it almost wants to accentuate what might be called the positive?
Greg McBride: Yes. I think you can boil that down to look at the longer-term trend and ignore the day-to-day noise. That is really what the Fed needs to do, is kind of be that steady hand and really put things in perspective, that you are not going to let those hiccups, as you said -- which are normal -- distract from the policy of getting back to what amounts to normal Fed policy, which is not buying tens of billions of dollars in bonds each and every month.
Mark Hamrick: So Greg, I'm aware, and many of our Bankrate listeners and readers are aware, that you came out with your kind of outlook for 2014 as it relates to interest rates, borrowing rates, savings rates, and, you know, generally, to paraphrase, you're not looking for a whole lot of change this year. Has anything occurred with this Fed meeting to make you change your outlook?
Greg McBride: No, not at all. This is what we expected. As it pertains to interest rates, 2014 is going to be the year when the Fed is dialing down and maybe completely getting out of the business of buying long-term bonds. What that is going to ultimately mean is a slow, steady grind higher in long-term interest rates. It has not worked out that way here in the first month of the year simply because of the volatility we are seeing in the markets. But, over time, a consistently improving economy and more job growth is going to prompt the Fed to maintain this policy of dialing back their stimulus and, I think, ultimately lead to those higher long-term rates. But, as the Fed said, once again they are no closer to raising short-term interest rates. That is still some ways off in the distance.
Mark Hamrick: And Greg, that means for savers, particularly for those people who are interested in certificates of deposit, that there's just no relief in sight, right?
Greg McBride: No, not from a yield perspective. If you have one feather in your cap, it is that at least inflation is setting the low bogie that you have to aim for. I think the thing that savers have to worry about is, at the point where those interest rates do start to rise, what is happening with inflation? Because if those rates start to rise at some point down the road, but they are only keeping pace with inflation or, worse, the Fed is chasing inflation, savers are not going to be better off.
Mark Hamrick: Greg, a lot of folks who watch the stock market -- let's say that that is their life's work solely, that part of the financial sector -- would say, I think, that as long as inflation, even if it's on the rise, as long as it's, let's say, under control or isn't surprisingly aggressive, that stock markets can continue to do just fine in that kind of environment. Would you agree with that?
Greg McBride: Yes. The Goldilocks situation is low inflation. Not too low, where you have to worry about deflation, but not at a pace where you have to worry about it having a big impact on buying power, particularly with tens of millions of Americans moving into retirement over the course of the coming decade. Low inflation is a good thing. If it gets too low, that is the type of thing that keeps Fed chairmen up at night and maybe even some investors, because they start to worry about deflation.
Mark Hamrick: Well one thing that wouldn't have to keep Ben Bernanke up at night, if he were to continue as Fed chair, and of course he doesn't and Janet Yellen steps in here very soon, is that there was no dissent on the part of FOMC members in this statement. And that's rather remarkable.
Greg McBride: Yes, it is. We have kind of grown accustomed to the fact that there has been some dissension, but for the first time in what seems like awhile, there was agreement. An agreement about an action and not agreement about inaction, but agreement that they are going to continue to taper, knocking another $10 billion a month off in monthly bond purchases. Just to put that bond-buying in perspective, even if they continue at this pace throughout the entire year, they are still going to buy one-third of the Treasury's net debt issuance this year, just in Treasuries. That is not even counting what they would be buying in mortgage-backed bonds.
Mark Hamrick: That's right, and the asset sheet at $4 trillion -- no one is terming that "measly," right Greg?
Greg McBride: No. It is not. That sort of raises the problem and will ultimately close the book on Ben Bernanke's legacy, and that is: How does the Fed successfully mop up all that liquidity without a resulting asset bubble or runaway inflation? Right now, Ben Bernanke is leaving with the equivalent of the bases loaded. If any runs score, they get charged to him. Just like Greenspan. He was a hero when he left, but nobody calls him the maestro anymore because of what happened after he left the Fed. Ultimately, history could judge Bernanke in a pretty similar way. He gets credit for steering us clear of a depression in 2008, but if we end up with an asset bubble or runaway inflation or something ugly as a result of all of this liquidity that has been created, it is going to be pinned on him.
Mark Hamrick: Indeed, those pages are still blank. Bankrate's Chief Analyst Greg McBride ... Greg, thank you.
Greg McBride: Thank you, Mark.
(CLOSE) Music transition….
You've been listening to "Special Report" from Bankrate.
Our editor in chief is Julie Bandy. Managing Editor Katie Doyle. Our editor is Doug Whiteman. And thanks to producer Amanda Rowe for her work in the studio.
For more on the Federal Reserve and other issues relating to personal finance, visit Bankrate.com.
I'm Mark Hamrick. Thank you for listening.
Trying not to rattle investors
One of the Fed's many challenges is the desire to reverse the extraordinary steps taken in response to the Great Recession, including an eventual increase in interest rates, without disrupting financial markets. Most members of the Federal Open Market Committee have said they believe the first such increase in the federal funds rate will come sometime in 2015.
Assessing Bernanke's performance
On Bernanke's job steering the Fed, Piegza says, "It's difficult to give him a grade below an A-minus." She credits his steady hand for helping to steer the economy out of the 2007-2008 financial crisis. "We have to applaud his reaction and his willingness to look outside the normal toolbox in terms of navigating the U.S. economy effectively out of these very dire times," Piegza says.
The next FOMC meeting is scheduled for March 18-19. Yellen is to hold her first news conference as chairwoman following the March meeting.
For the first time in at least a year, no committee members dissented from the policy statement. Last year, FOMC member Esther L. George dissented in seven of the eight meetings, on the grounds that the Fed's easy-money policy threatened to increase inflation. In December, Eric S. Rosengren dissented for the opposite reason, saying that the Fed was reducing its asset purchases too early, threatening the recovery.
John Canally, chief economist with LPL Financial, notes that it's been a long time since a Fed statement didn't have a dissent. The decision to continue reducing asset purchases is enough to enlist support from everyone on the committee, he says. Canally says the committee faced a "high hurdle" to knock the central bank off the path of reduced asset purchases, established in December.
So now you know what happened, but what did the Fed say in plain English?