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The Fed delivered a clear message Wednesday after its two-day meeting: Don’t expect the easy monetary policies to end anytime soon.
The Central Bank’s official policy statement, the first of 2013, said interest rates would remain near zero, at ¼%, and the aggressive $85 billion-a-month bond-buying program would continue for a “considerable time.”
Word of the Fed’s decision came just hours after a Commerce Department report showed gross domestic product had declined for the first time since the Great Recession, slipping 0.1% in the fourth quarter.
The GDP’s first decline in 3 1/2 years had led economists to predict the Fed would stick to its easy money policies for the time being.
“There is no hint that they are giving any thought of backing off current policy and their current stance,” Wells Fargo’s senior economist Mark Vitner told Bloomberg.
“Growth has slowed and inflation is running below expectations. To the extent the Fed’s decisions are data dependent, all the relevant data suggest they should continue to ease.”
Fed Explains Decision
The Federal Open Market Committee cited the significant slowdown facing the anemic U.S. economy but also noted continued, though tepid, improvement in the job and housing markets.
In December, the Fed said it would continue spending $85 billion a month on bond purchases to keep interest rates low. At the same time, the Fed set unemployment and inflation “thresholds” instead of a date when the central bank expected to be able to raise interest rates.
While struggling global markets are showing signs of stabilizing, the Fed said it still sees downside risks to the economic outlook.
The Central Bank’s easy money policy remains aimed at keeping interest rates down, supporting mortgage markets and boosting the stagnant economy.
Reiterating its goal of reaching maximum employment, the Fed said: “If the outlook for the labor market does not improve substantially, the Committee will continue its purchase of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.”
The Fed also kept the goalposts set last year in place, 6.5% unemployment and 2% inflation, in determining how long to maintain its quantitative easing.
“When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%,” the statement said.
The Fed’s decision comes as the nation braces for deep across-the-board spending cuts and adjusts to tax increases, both of which could be a real drag on the economy.
“Until we get through some of these fiscal uncertainties, they’re not going to want to risk pulling back,” Julia Coronado, chief economist for North America at BNP Paribas, shared with Bloomberg. “For the next several meetings, it’s probably a pretty easy choice. You monitor the risk, but you keep a steady hand and keep expanding the balance sheet.
Markets React to Fed Statement
U.S. markets showed little reaction immediately after the Fed’s statement, but lost ground heading into the closing bell.
Equity markets Wednesday had shrugged off the disappointing GDP data early in the day. But by 4 p.m., the Dow was down 45, the S&P 500 lost 6 and the Nasdaq gave back 11.
However, precious metal marched higher. The feeble GDP numbers and the absence of change in the Central Back’s liberal bond purchase program sent gold and silver spiking higher.
Gold prices ended the day with stellar gains, up $16.30 to $1,677.10 an ounce. Also buoying gold was a weaker dollar. The U.S. dollar index ended solidly lower Wednesday, hitting a fresh five-week low. Silver ended up .93 cents at $32.11 an ounce.
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