U.S. Federal Reserve Chairman Ben Bernanke begins his final planned news conference before his retirement, at the Federal Reserve Bank headquarters in Washington, December 18, 2013.JONATHAN ERNST/Reuters
The U.S. recovery has found a higher gear, allowing the country's central bank to begin winding down its extraordinary and controversial economic stimulus.
As the U.S. Federal Reserve's policy committee gathered on Wednesday to conclude its final meeting of the year, fresh data showed that housing starts in November surged to their highest levels in more than five years. The report added to recent evidence that industrial production, retail sales and hiring were stronger this fall than the Fed and many on Wall Street expected.
An even bigger surprise than the warming of the U.S. economy is the cooling of temperatures on Capitol Hill, where legislators passed a budget for the first time in four years, suggesting a period of fiscal peace that should bolster consumer and business confidence.
It was enough to convince the Fed's leaders to surprise Wall Street with a signal of the end of the central bank's policy to stimulate the economy by creating tens of billions of dollars each month to buy financial assets.
The central bank said on Wednesday that in January it will buy $75-billion (U.S.) of government debt and securities backed by home loans – $10-billion less than it has been buying since September, 2012. Provided the recovery remains on track, the Fed said it would continue to pare its asset purchases at about the same deliberate pace as 2014 wears on.
U.S. stock markets jumped to new records – not because the Fed intends to get out of financial markets, but because the central bank balanced the move with a promise to keep its benchmark lending rate at zero for longer than it was planning to earlier this year.
The Dow Jones Industrial Average gained almost 293 points, closing at 16,167.97, and the Standard & Poor's 500 Index, another closely watched gauge of corporate America's health, surged 1.7 per cent to 1,810.65, the biggest increase in two months.
Earlier this year, financial markets slumped on the prospect of the Fed curbing its asset-purchase program, called quantitative easing, or QE.
Previously, the Fed said it would consider raising its benchmark lending rate when the unemployment rate fell to 6.5 per cent.
Now, the central bank says it will not consider a change until the jobless rate is "well past" that point, so long as inflation remains in check. Based on the Fed's forecasts, that will not happen until late 2015 at the earliest.
"We're not doing less," Fed chairman Ben Bernanke said at a press conference, emphasizing that he and his counterparts remain concerned about the labour market.
The announcement allowed Mr. Bernanke – who will retire next month after eight years as chairman – to signal the end of a policy innovation for which he is largely responsible. The current QE program is the Fed's third, and each has been met with resistance because the creation of money historically is associated with inflation and asset-price bubbles. The Fed's portfolio of assets is almost $4-trillion and will continue to grow until it finally winds up QE. It held less than $1-trillion before the crisis.
The lacklustre pace of economic growth since the recession raises questions about QE's effectiveness, but Mr. Bernanke said on Wednesday that he is convinced the policy created jobs. He also pointed out the Fed had no help from the federal government: The rebound from the financial crisis is a rare example of a recovery in which public spending and hiring decreased rather than increased.
"Monetary policy appears to have offset a good deal of fiscal drag," said Mr. Bernanke, who has called on Congress repeatedly to write a budget that puts off deficit reduction until the economy has healed properly.
With Mr. Bernanke set to depart, politicians may finally be listening. Another reason the Fed was able to step back from QE was that the economic headwinds generated by Washington's partisan fiscal battles are receding.
The Senate on Wednesday passed a two-year budget 64 to 36, suggesting an end to the ongoing fiscal battles that have undermined consumer and business confidence. The fiscal plan also reduces planned spending cuts, meaning austerity will be a lesser drag on the economy. At the same time, states and municipalities, hit hard by the crisis, are starting to spend again.
A better prognosis for the economy does not mean the patient is ready to walk alone, however.
The Fed has a legislative mandate to achieve "maximum" employment, a directive that some policy makers associate with an unemployment rate as low as 5.2 per cent – considerably lower than the current 7 per cent.
The recovery so far has failed to sustain annual growth rates in excess of 3 per cent that typically follow a recession. The Fed characterized the pace of the recovery as "moderate" and said it considers the jobless rate "elevated."
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