Fed reaffirms stimulus plan despite bright spots

Federal Reserve Board Chairman Ben Bernanke talks during a news conference at the Federal Reserve offices in Washington, March 20, 2013. [Photo/Agencies]

WASHINGTON - The Federal Reserve on Wednesday pressed forward with its aggressive policy stimulus despite improvements in the US economy, pointing to still-high unemployment, fiscal headwinds out of Washington and risks from abroad.

Meeting as turmoil in Europe took another turn for the worse, the US central bank appeared unfazed by concerns that its $85 billion in monthly bond purchases could disrupt financial markets or inflate asset bubbles.

The Fed's policy-setting committee nodded to brighter economic signs in the United States. But Chairman Ben Bernanke said he had not yet seen meaningful changes to the troubled labor market, and noted that tighter fiscal policy is one reason the central bank has been so aggressive.

Most Fed policymakers believe the purchases of Treasury and mortgage bonds are lowering longer-term borrowing costs and providing "meaningful support to economic growth and job creation", Bernanke told a news conference after the central bank announced its decision.

"However, most also agree that this monetary tool will likely not be able on its own to fully offset major economic headwinds such as those that might arise from significant near-term fiscal restraint, or from a sharp increase in global financial stresses," he said.

The Fed cut overnight interest rates to near zero in 2008 and has bought more than $2.5 trillion in bonds to spur consumption, investment and hiring.

Its efforts appear to be paying off, with a rash of recent data showing the economy gathering strength. Retail sales have been stronger than expected, manufacturing output has picked up and employment growth has quickened, with the jobless rate dropping to 7.7 percent last month from 7.9 percent in January.

Bernanke said the central bank might slow the pace of its bond buying as the economy strengthened, but that it would only do so after the labor market showed sustained improvement over a number of months.

Some Fed officials have expressed concern that the purchases could fuel asset price bubbles, spark future inflation or lead to balance sheet losses later this decade. But Bernanke gave no indication those risks might soon become a binding constraint.

"These costs remain manageable but will continue to be monitored, and we will take them into appropriate account as we determine the size, pace and composition of our asset purchases," he said.

The vote to continue with the purchases was 11-1, with Kansas City Federal Reserve Bank President Esther George dissenting for a second straight time.

The decision helped calm investors who had been worried about a flare-up in the euro zone's debt crisis. US stocks closed higher, the dollar rallied against the yen and prices for US Treasury debt dropped.

"The Fed still is in a very dovish mode and I do not expect to see them remove policy accommodation anytime soon," said Eric Stein, co-director of global income at Eaton Vance Management in Boston.