The Federal Reserve maintained a commitment to keep interest rates near zero for a "considerable time" after asset purchases are completed, saying the economy is expanding at a moderate pace and inflation is below its goal.
"Labor market conditions improved somewhat further" while "significant underutilization of labor resources" remains, the Federal Open Market Committee said today in a statement in Washington. "Inflation has been running below the committee's longer-run objective." In July, the Fed said inflation was "somewhat closer" to its goal.
Policy makers tapered monthly bond buying to $15 billion in their seventh consecutive $10 billion cut, staying on course to end the program in October. Bond purchases intended to hold down long-term interest rates have swelled the Fed's balance sheet to $4.42 trillion.
"They want to let the market know they are not ready to raise rates anytime soon," said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. "Inflation is buying them time to do nothing. Inflation is running below expectations so they don't need to be engaged" in signaling tightening.
Rate Forecast
Even so, Fed officials raised their median estimate for the federal funds rate at the end of 2015 to 1.375 percent, compared with 1.125 percent in June.
The rate will be at 3.75 percent at the end of 2017, the Fed said today for the first time as it included that year in its Summary of Economic Projections. That is the same as Fed officials' longer-run estimate. The median estimate in June for the long-run fed funds rate was also 3.75 percent.
Chair Janet Yellen and her Fed colleagues are debating how much longer to keep interest rates near zero as they get closer to their goals for full employment and stable prices. At the same time, they are considering a change in guidance on the outlook for borrowing costs to give them more flexibility to react to the latest economic data.
"The likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year," according to the statement.
The personal consumption expenditures index, the central bank's preferred price gauge, increased 1.6 percent in July from a year earlier and hasn't exceeded the Fed's 2 percent objective since March 2012.
Stocks rose after the Fed announcement, with the Standard & Poor's 500 Index up 0.3 percent at 2,004.43 as of 2:22 p.m. in New York. Ten-year Treasuries yielded 2.58 percent, down 0.01 percentage point. Wide Range
The Fed repeated that it will consider a wide range of information in deciding when to raise the benchmark federal funds rate, which it has kept near zero since December 2008.
Bond purchases will be divided between $10 billion in Treasuries and $5 billion in mortgage-backed securities. The Fed also said it will maintain its policy of reinvesting maturing debt.
Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser dissented.
The Fed published new guidelines for its exit strategy, saying that the phaseout of reinvestment "will depend on how economic and financial conditions and the economic outlook evolve."
FOMC participants said the main tool to move the federal funds rate will be changes in the interest rate it pays on excess reserves. Fed officials said reverse repurchase agreements will be used "as needed" to help control the fed funds rate and will phase out later.
Yellen is due to give a press conference scheduled at 2:30 p.m. today in Washington.
Main Rate
The Fed has said since March that its benchmark rate would stay low for a "considerable time" after it completes monthly bond buying intended to boost growth. With purchases coming to an end, officials started debating how much longer to keep the guidance.
The need for new language brought together policy makers who want to keep rates low with those who prefer to raise them sooner. Both sides said guidance should be tied to progress toward the Fed's goals of full employment and price stability, rather than time periods.
