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Improving U.S. economy leads Fed to ease stimulus

By Martin Crutsinger
Associated Press

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  • Bernanke says he’s staying in D.C., will visit Charlotte

    Outgoing Federal Reserve Chairman Ben Bernanke, in his farewell news conference, said he plans to stay in Washington for the immediate future, but will be spending Christmas vacation in North Carolina, where he has family in Charlotte and Durham.

    Bernanke grew up in Dillon, S.C., but as a child visited his maternal grandparents in Charlotte, where in a past speech he recalled playing chess with his grandfather and appearing in a Charlotte Observer photo accompanying a recipe for his grandma’s blintzes.

    Asked by a McClatchy Washington Bureau reporter whether he planned to retire in South Carolina, Bernanke said most of his family is now in North Carolina, but his uncle, Mort, still lives in Dillon. “He's 85 and very, very chipper,” he said.

    In past years, Bernanke has come to Charlotte to visit his parents and his brother, Seth, and his family. Bernanke’s father, Phil, died last year.



WASHINGTON The Federal Reserve has sent its strongest signal of confidence in the U.S. economy since the Great Recession struck six years ago: It’s decided the economy is finally strong enough to withstand a slight pullback in the Fed’s stimulus.

Yet the Fed also made clear it’s hardly withdrawing its support for an economy that remains below full health. Chairman Ben Bernanke stressed that the Fed would still work to keep borrowing rates low to try to spur spending and growth and increase very low inflation.

At his final news conference as chairman before he leaves in January, Bernanke managed a delicate balance: He announced a long-awaited and long-feared pullback in the Fed’s stimulus. Yet he did so while convincing investors that the Fed would continue to bolster the economy indefinitely. Wall Street roared its approval.

The Fed said in a statement after its policy meeting ended Wednesday that it will trim its $85 billion a month in bond purchases by $10 billion starting in January. Bernanke said the Fed expects to make “similar moderate” cuts in its purchases if economic gains continue.

At the same time, the Fed strengthened its commitment to record-low short-term rates. It said for the first time that it plans to hold its key short-term rate near zero “well past” the time when unemployment falls below 6.5 percent. Unemployment is now 7 percent.

The Fed’s bond purchases have been intended to drive down long-term borrowing rates by increasing demand for the bonds. The prospect of a lower pace of purchases could mean higher loans rates over time.

Nevertheless, investors seemed elated by the Fed’s finding that the economy has steadily strengthened, by its firm commitment to low short-term rates and by the only slight amount by which it’s paring its bond purchases.

The Dow Jones industrial average soared nearly 300 points. Bond prices fluctuated, but by late afternoon the yield on the 10-year Treasury note had barely moved. It inched up to 2.89 percent from 2.88 percent.

“We’re really at a point where we’re getting to the self sustaining recovery that the Fed has been talking about,” Scott Anderson, chief economist of Bank of the West. “It really seems like that’s going to come together in 2014.”

The Fed’s move “eliminates the uncertainty as to whether or when the Fed will taper and will give markets the opportunity to focus on what really matters, which is the economic outlook,” said Roberto Perli, a former Fed economist who is now head of monetary policy research at Cornerstone Macro.

But Perli noted that the Fed will continue to buy bonds every month to keep long-term rates down and remains strongly committed to low short-term rates. By keeping rates historically low, the Fed “will continue to remain very supportive of risky assets” such as stocks, Perli said.

The stock market has enjoyed a spectacular 2013, fueled in part by the Fed’s low-rate policies. Those rates have led many investors to shift money out of low-yielding bonds and into stocks, thereby driving up stock prices. Still, the gains have been unevenly distributed: About 80 percent of stock market wealth is held by the richest 10 percent of Americans.

In updated economic forecasts issued Wednesday, the Fed predicted that unemployment would fall a bit further over the next two years than it thought in September. And it expects inflation to remain below the Fed’s target level.

The Fed expects the unemployment rate to dip as low as 6.3 percent next year and 5.8 percent in 2015. Unemployment has fallen faster this year than policymakers had predicted.

And Fed policymakers predict that their preferred inflation index won’t reach its target of 2 percent until the end of 2015 at the earliest. For the 12 months ending in October, the inflation index is up just 0.7 percent.

The Fed worries about very low inflation because it can lead people and businesses to delay purchases. Extremely low inflation also makes it costlier to repay loans.

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