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Upbeat Fed stays the course

July 31, 2014

The US Federal Reserve has said it is in no rush to raise interest rates, even while issuing positive predictions on inflation and economic growth. The central bank continued scaling back its stimulus spending.

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USA, Washington, Eccles Building
Image: DW/A. Passenheim

The Federal Reserve on Wednesday remained on track to cut out its stimulus spending before the end of the year, as planned. In its monthly report, the Fed reduced its monthly spending on government bonds to $25 billion (18.66 billion euros) from $35 billion, the latest in a string of decreases.

The central bank, issuing its results shortly after the US reported robust 4-percent year-on-year economic growth for the second quarter, also expressed some comfort that US inflation rates were moving towards their targets. However, it sought to assure investors that near-zero interest rates would not be raised in the short term.

"Labor market conditions improved, with the unemployment rate declining further," the Fed said in a statement. "However, a range of labor market indicator suggests that there remains significant underutilization of labor resources."

Overnight interest rates have stood at almost zero since December 2008, with the Fed racking up trillions in debt on its stimulus spending in that time. The Fed said on Wednesday that it would likely keep interest rates unchanged for "a considerable time" after its bond-buying program ended. Still, many analysts saw the statement as a change of tone from the Fed's last report in June.

Janet Yellen FED Chefin Pressekonferenz Leitzins
Yellen is charged with phasing out five unprecedented years of near-zero base interest ratesImage: Reuters

"It's a bit more hawkish than the previous statement," Bricklin Dwyer, an economist at BNP Paribas, told Reuters. "There is clear acknowledgement of labor and inflation progress."

Unemployment in the US stands at 6.1 percent and is sinking, but policymakers, including Fed Chair Janet Yellen, have warned that the figures overstate the health of the US jobs market. Some economists, including Philadelphia Federal Reserve Bank President Charles Plosser, criticized Wednesday's plans. Plosser argued that remaining at low interest rates for too long could fuel unwanted levels of inflation.

The S&P financial index rose 0.4 percent in Wednesday's trading in response to the announcement, while the Nasdaq climbed 0.5 percent and the Dow Jones industrial average slipped by just 0.2 percent.

msh/jm (AP, Reuters)