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Fed cuts monthly bond purchases and sounds upbeat

Published on NewsOK Modified: April 30, 2014 at 3:54 pm •  Published: April 30, 2014
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WASHINGTON (AP) — The Federal Reserve struck an encouraging note Wednesday: It will further cut its bond purchases because the U.S. job market needs less help. And it said the economy had strengthened after all but stalling during a harsh winter.

The Fed also reaffirmed its plan to keep short-term interest rates low to support the economy "for a considerable time" after its bond purchases end, likely late this year. But it again offered no specific timetable for any rate increase. Most economists expect no rate increase before mid-2015 at the earliest.

Investors liked what they heard. Stocks rose after the Fed issued its statement, and the Dow Jones industrial average closed up 45 points to a record 16,580.

The Fed's guidance on short-term rates conforms to goals that Chair Janet Yellen noted in a speech this month. She said the Fed's rate policies must be flexible enough to meet unexpected economic challenges.

The Fed's description of an economy rebounding from the winter freeze was the only meaningful change it made from the statement it issued in March, after the first meeting that Yellen led after taking over in February.

Wednesday's statement also repeated the theme the Fed sounded in March that even after the job market strengthens and it starts raising rates, it will likely keep rates unusually low to support a still-subpar economy.

The Fed's decision was approved on a 9-0 vote. Narayana Kocherlakota, president of the Fed's Minneapolis regional bank, supported the action. Kocherlakota had dissented from the March statement because he objected to a change in the Fed's guidance on rates: He favored lowering the threshold for a possible rate increase to an unemployment rate of 5.5 percent.

Instead, the Fed eliminated its previous 6.5 percent unemployment threshold entirely. It said it instead planned to monitor a range of data to determine the economy's progress in moving toward the Fed's dual goal of full employment and inflation rising 2 percent annually. That shift was seen as giving the Fed more flexibility in its policymaking.

Wednesday's statement was issued the same day that the government said the economy's growth slowed to a barely discernible 0.1 percent annual rate in the first three months of 2014, the weakest performance in more than a year. Economists blamed mainly the harsh winter and predicted that growth would rebound to a 3 percent annual rate or better in the current quarter. In its statement, the Fed made no specific mention of the anemic growth last quarter.

"It's in the rear-view mirror," said Greg McBride, senior financial analyst at Bankrate.com. "We're one month into the second quarter, and we've already seen some indicators that economic growth will get stronger."

Yellen has tried to convey that the Fed is prepared to respond quickly to changes in the economy. But her emphasis on flexibility can also be tricky. It can leave investors uncertain and fearful of a sudden shift in the Fed's approach to interest rates.

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