Fed taper continues, policymakers divided on future interest rates

06/18/2014 6:53 PM

06/21/2014 2:09 PM

The Federal Reserve on Wednesday further ramped down its controversial bond-purchasing program and signaled that it will begin raising interest rates next year in a long awaited return to normalcy.

The Fed tapered back its purchases of government and mortgage bonds by $10 billion to a sum $35 billion a month. That’s half of where it was in December 2013 when the Fed began trimming its holdings of bonds that were bought in order to push down long-term lending rates and spark growth.

“The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions,” the Fed said in a statement announcing the continued taper of purchases.

The Fed is on pace to end its bond buying late this year, and that signals it would be ready to begin raising its benchmark interest rate, which has been near zero since December 2008 amid the Great Recession.

The increase in the benchmark rate, which influences the prime rate banks charge their best borrowers, would signal that things are getting back to normal. It’d also raise the cost to borrow to buy a home or car, or for businesses to borrow to expand.

But in a sign of how abnormal monetary policy has been, a long-term projection of the Fed’s benchmark rate, released Wednesday, shows its policymakers are all over the map about how much of a rise in lending rates they expect.

They all expect the Fed’s rate to rise beginning next year. However, eight don’t think it will rise above 1 percent, while the other eight members see higher than that, with one policymaker thinking it will rise to 3 percent.

“There is uncertainty about what the path of short-term interest rates will be,” Fed Chair Janet Yellen said at a news conference Wednesday.

If the eight projecting higher interest rates are right, it’d signal one of two things. Either the economy is growing so fast that it’s pushing up inflation that needs to be knocked back, or that even with a modest pace of economic growth inflation is exceeding the 2 percent target that the Fed sets as its sweet spot.

For 2016, Fed policymakers estimate a benchmark rate of about 2.5 percent but one member projects interest rates will remain below 1 percent in 2016, while two think it will be 4 percent or higher.

“You do see a range of disagreement among the participants. By the time you get to 2016, there is a considerable range of opinions” about rates, Yellen acknowledged, refusing tosay when the first rate hike would come and warning “there is no mechanical formula.”

Separately, the Fed revised downwards its growth forecast for 2014, projecting growth between 2.1 percent and 2.3 percent this year. That’s down from 2.8 percent and 3 percent projected in March.

By contrast, the Fed now sees an unemployment rate between 6 percent and 6.1 percent this year, whereas it projected in March a range between 6.1 percent and 6.3 percent for the year.

Email: khall@mcclatchydc.com; Twitter: @KevinGHall.

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