Federal Reserve scales back stimulus.

The Federal Reserve would reduce its monthly bond-buying campaign to $75 billion in January, beginning a retreat from its stimulus campaign, because it no longer saw the need for the full force of those efforts.

The Fed sought to offset concerns that it was once again pulling back too soon by reinforcing its intent to hold short-term interest rates near zero “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the committee’s 2 percent longer-run goal.”

The steps, announced after a two-day meeting of the Fed’s policy-making committee, represent the beginning of a long-anticipated shift in Fed strategy. Officials say that the bond-buying campaign, which has totaled $85 billion a month until now, has contributed to a modest increase in job creation, but that they are concerned about the Fed’s reliance on a relatively untested form of monetary policy. They would like instead to lean more heavily on “forward guidance” about short-term interest rates, a more familiar policy tool.

“The committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy,” the committee said in a statement on Wednesday.

 

The Fed’s actions won the support of Esther George, the president of the Federal Reserve Bank of Kansas City, who has dissented at each previous meeting this year over concerns that the Fed was doing too much. But with the balance swung in favor of her conservative views, the decision drew a dissent from Eric S. Rosengren, the president of the Federal Reserve Bank of Boston, who called it “premature.”

 

The Fed is struggling to calibrate its stimulus campaign in an environment of steady but mediocre growth. The unemployment rate has declined over the last year, reaching 7 percent in November. That is still a high rate by historical standards, and other measures of the labor market look even worse. Wages are barely rising, and the share of adults with jobs has not climbed since the recession.

 

A variety of indicators suggest that the American economy may be growing more quickly than analysts had predicted during the final quarter of the year, and Fed officials expect somewhat faster growth in the coming year. But the persistence of low inflation indicates that the economy still is operating well below its capacity.

 

By one measure, prices increased by only 0.7 percent during the 12 months that ended in October. “We don’t have a good story about why this is,” James B. Bullard, president of the Federal Reserve Bank of St. Louis, said in November. “You would have expected to see more inflation pressure by this point. We haven’t seen it.”

 

The Fed over the last year has purchased more than $1 trillion in Treasury and mortgage-backed securities in an effort to encourage job creation.

Fed officials say the purchases have modestly reduced consumer and business borrowing costs, contributing to a rise in auto sales, for example. They say the program also has helped to revive an appetite for risk-taking, driving up stock prices.

Janet L. Yellen, the Fed’s vice chairwoman, who is awaiting Senate confirmation as successor to the chairman, Ben S. Bernanke, said in her confirmation hearing last month that bond-buying had made “a meaningful contribution to economic growth.”

“The ripple effects go through the economy and bring benefits to, I would say, all Americans,” said Ms. Yellen, a leading proponent of the campaign.

 

But independent analysts have struggled to isolate the effects of the program and have reached wide-ranging conclusions about its impact. A study presented in August at the annual Jackson Hole, Wyo., monetary policy conference found that Treasury purchases in particular had “limited economic benefits.” A study by the McKinsey Global Institute found “little evidence” of an impact on stock prices.

 

Some Fed officials and outside analysts including the International Monetary Fund also see evidence that the benefits of bond-buying have diminished over time. For technical reasons, the impact appears to fade as markets return to normalcy.

 

These doubts, along with concerns about potentially harmful consequences of continued asset purchases, have prompted the Fed to emphasize another aspect of its stimulus campaign, its forward guidance about the level of short-term interest rates.

 

The Fed has said that it intends to keep rates near zero at least as long as the unemployment rate remains above 6.5 percent and inflation remains low. Last month, Mr. Bernanke described that unemployment threshold as the point at which the Fed would to deliberate about the appropriate time to raise rates.

 

At the Fed’s previous meeting, in October, officials debated a range of options to further strengthen this guidance. The most popular ideas included a formal declaration that the central bank is likely to raise short-term rates relatively slowly even after it ends the long period that it has held those rates near zero.

 

On Wednesday, Fed officials continued to predict that the Fed will begin to increase short-term interest rates by the end of 2015. But the projections, in updated economic forecasts that the Fed published separately, showed a growing consensus that rates will still be quite low by the end of that year. Six officials, up from three in September, said they expected rates would then sit below 0.5 percent. And the average of the 17 predictions fell to 1.125 percent from 1.25 percent.

 

The officials predicted that inflation would remain weak over the next three years, not exceeding the Fed’s 2 percent target at any point during that period.

Officials estimated prices next year would rise between 1.4 and 1.6 percent, well below the Fed’s target. Just a few months ago, in June, officials forecast that inflation in 2014 would be 1.4 to 2 percent.

 

At the same time, Fed officials predicted unemployment would fall more quickly than they previously expected. They estimated the jobless rate would sit between 6.3 and 6.6 percent, down from a range of 6.4 to 6.8 percent.

This meeting was the fifth anniversary of the Fed’s decision, in December 2008, to reduce its benchmark interest rate nearly to zero for the first time in its history.

It also was the 100th anniversary of the Fed’s creation in December 1913.

 

The New York Times