Fed maintains low interest-rate policies

Washington (Oct 31)   The Federal Reserve says its low interest-rate policies are still needed to invigorate a subpar U.S. economy.

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 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.”

Ashworth said that if the Fed isn’t worried about the economic impact of the shutdown, it might be ready to reduce its stimulus as early as December. He still thinks a pullback is most likely early next year. But Ashworth said the Fed’s statement suggests that its timing may have shifted.

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.”