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Friday May 22nd, 2015 6:13PM

Fed leaves low interest-rate policies unchanged

By The Associated Press
WASHINGTON (AP) -- The Federal Reserve says the U.S. economy still needs support from its low interest-rate policies because it is growing only moderately.

In a statement Wednesday after a policy meeting, the Fed said it would keep buying $85 billion a month in bonds to keep long-term interest rates low and encourage borrowing and spending.

Yet the Fed seemed to signal that it thinks the economy is improving despite some recent weak data and uncertainties caused by the partial government shutdown.

The Fed no longer expresses concern, as it did in September, that higher mortgage rates could hold back hiring and economic growth. And its statement makes no reference to the 16-day shutdown, which economists say has slowed growth this quarter.

Some analysts said this suggests that the Fed might be prepared to slow its bond purchases by early next year - sooner than some have assumed.

"The tone was probably more positive on the outlook than most people expected," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics.

Paul Ashworth, an economist at Capital Economics, said he was struck by the absence of any reference to the shutdown. He called the statement "remarkable for what it omits rather than includes."

Some economists noted that Congress' budget fight has clouded the Fed's timetable for tapering its bond purchases. Though the government reopened Oct. 17 and a threatened default on its debt was averted, Congress passed only temporary fixes. More deadlines and possible disruptions lie ahead.

Without a budget deal by Jan. 15, another shutdown is possible. Congress must also raise the government's debt ceiling after Feb. 7. If not, a market-rattling default will remain a threat.

If the government manages to avert another shutdown in mid-January, Dana Saporta, an economist at Credit Suisse, said, "We could see a taper as soon as the Jan. 29th meeting."

But she added that a continued budget impasse would likely delay any pullback in the Fed's bond purchases until March or later.

Investors seemed to conclude that the Fed might be ready to reduce its stimulus earlier than expected. The Dow Jones industrial average, which had been down 29 points before the Fed issued its statement, fell nearly 63 points an hour and half later.

And the yield on the 10-year Treasury note, a benchmark for rates on mortgages and other loans, rose from 2.49 percent to 2.52 percent. That suggested that investors think long-term rates may rise because of less bond buying by the Fed.

At the same time, the Fed noted again in its statement that budget policies in Washington have restrained economic growth.

And it will stick to its low-rate policy: It reiterated that it plans to hold its key short-term rate at a record low near zero at least as long as the unemployment rate stays above 6.5 percent and the inflation outlook remains mild.

The Fed's policy decision was approved on a 9-1 vote. Esther George, president of the Kansas City Federal Reserve Bank, dissented, as she has at each of the seven meetings this year. She repeated her concerns that the Fed's bond purchases could fuel high inflation and financial instability.

At its previous meeting in September, the Fed surprised investors and economists when it chose not to reduce its bond buying. Since then, the partial shutdown shaved an estimated $25 billion from economic growth this quarter. And a batch of tepid economic data point to a still-subpar economy.

Employers added just 148,000 jobs in September, a steep slowdown from August. And temporary layoffs during the shutdown are expected to depress October's job gain.

Since the September meeting, mortgage rates have fallen roughly half a percentage point and remain near historically low levels. Over the summer, rates had jumped to two-year highs on speculation that the Fed might reduce the pace of its bond purchases before the end of this year.

The Fed has one more policy meeting this year in December. The subsequent meeting in January will be the last for Chairman Ben Bernanke, who is stepping down after eight years. President Barack Obama has chosen Vice Chair Janet Yellen to succeed Bernanke.

Assuming that Yellen is confirmed by the Senate, her first meeting as chairman will be in March. Many economists think no major policy changes will occur before a new chairman takes over.
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