Federal Reserve Chairman Ben S. Bernanke is keeping additional easing on the policy-making table even after upgrading his view on the U.S. expansion.
Stocks rose and Treasurys fell after the Federal Open Market Committee yesterday improved its outlook for growth, reducing expectations the central bank will begin a third round of bond buying. At the same time, the FOMC reiterated in a post- meeting statement that the joblessness rate is “elevated” and “significant downside risks” remain.
Even after the most robust six-month period of job growth since 2006, unemployment persists at 8.3 percent and Bernanke is holding to his plan to keep the benchmark interest rate close to zero through at least late 2014.
“The way the statement was crafted was to keep their options open,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “What they’re trying to tell us is ‘Hey, don’t change your policy outlook because we’re not ready to say things have changed enough’” that no more stimulus is needed.
The Fed has kept its benchmark rate near zero since December 2008, and in January extended a previous pledge to keep rates low through mid-2013. It has also bought $2.3 trillion of bonds in two rounds of so-called quantitative easing.
Unemployment will “decline gradually” toward Fed goals and the inflation outlook is “subdued,” the FOMC said. Policy makers said they expect “moderate economic growth,” compared with a prediction of a “modest” expansion after their January meeting.
“The FOMC is clearly shifting its stance away from blanket gloom to something more realistic, but they have a long way to go,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York. “The data will force their hand.”
The Standard & Poor’s 500 Index rose 1.8 percent to 1,395.95 at 4 p.m. in New York, and the Dow Jones Industrial Average reached the highest level since 2007. Yields on 10-year Treasurys rose to 2.13 percent from 2.03 percent on March 12.
Treasury yields are climbing as the economy strengthens and the Fed may be forced to raise its benchmark rate before late 2014, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. The 10-year Treasury note yield has increased from 1.8 percent on Jan. 31.
“Yields are rising with the tide of a stronger economy,” said Rupkey, who predicts the Fed will need to tighten monetary policy in 2013. “They should really welcome it. Higher yields mean the many unorthodox monetary policy measures are starting to bear fruit.”
Fed officials probably don’t welcome the rise in interest rates and likely want to keep stimulus options open so as not to see “the market re-price the policy outlook prematurely,” Stanley said.
A government report yesterday showed retail sales advanced 1.1 percent in February for the most in five months. The gain followed a 0.6 percent increase in January that was larger than previously estimated. Demand improved in 11 of 13 industry categories, including auto dealers and clothing stores.
The odds of additional stimulus were decreasing before the FOMC statement. Sixty-one percent of economists in a March 9-12 poll by Bloomberg News said Bernanke will refrain from any action to expand the Fed’s $2.89 trillion balance sheet this year. In January, 50 percent of those surveyed predicted more bond buying.
Economists were split over whether the Fed, if it chooses to ease further, would purchase bonds while taking steps to ensure its move doesn’t increase inflation pressures. Thirty percent of economists say the Fed would “sterilize” the impact of its purchases by using repurchase agreements and term deposits to prevent new money from entering the economy.
“There is nothing here to suggest it would happen anytime soon,” said Jay Bryson, senior global economist with Wells Fargo Securities LLC in Charlotte, North Carolina.
“You would need to have the economy hitting another soft path” for more stimulus, he said. Still, “they are not slamming the door on more QE.”
The FOMC’s meetings in April and June would be “good opportunities for the Fed to do something” if policy makers see additional stimulus as needed, Roberto Perli, a managing director at International Strategy and Investment Group Inc. in Washington said in a Bloomberg Radio interview.
“They want to keep their powder dry in case they need to take further action later in the year,” said Bill Hampel, chief economist for the Washington-based Credit Union National Association. The organization represents 8,000 member-owned co-operatives with $961.8 billion in assets.
“In case they need to do a QE3, this is giving them leeway to do it if they think it’s necessary later in the year,” he said.
© Copyright 2014 Bloomberg News. All rights reserved.