US Federal Reserve stops bond-buying programme

Most economists predict it will not raise that rate before mid-2015. The Fed’s benchmark rate affects rates on many consumer and business loans.

But in a statement following a policy meeting, the Fed noted that the job market is strengthening. Its statement drops a previous reference to “significant” in referring to an “underutilisation” of available workers.

Instead, the Fed said the excess of would-be job holders is “gradually diminishing”.

It also noted solid hiring gains and a lower unemployment rate, now 5.9%. One of the Fed’s major goals is to achieve maximum employment, which it defines as an unemployment rate between 5.2% and 5.5%.

The Fed repeated previous language that the likelihood of inflation running persistently below its 2% target rate has diminished, even though inflation is being restrained by lower energy prices and other factors.

Investors responded to confirmation that the Fed would end its bond-buying programme by positioning themselves for higher rates. The dollar rose against other currencies, and bond yields rose, and the price of gold fell.

Michael Hanson, senior economist at Bank of America Merrill Lynch, said the Fed still appears likely to put off any rate increase until at least mid-2015.

“This isn’t the Fed rushing to the exits,” he said.

Mr Hanson noted that while the Fed kept its “considerable time” phrasing, it added language stressing that any rate increase would hinge on the economy’s health.

Previously, many analysts had interpreted the “considerable time” phrase to mean the Fed would not raise rates for a specific period after it ended its bond purchases.

The Fed’s statement was approved 9-1. The one dissent came from Narayana Kocherlakota, president of the Fed’s regional bank in Minneapolis.

He contended that the Fed should have signalled its intention to maintain a record-low benchmark rate until the inflation outlook has reached the central bank’s 2% target. And he argued that the Fed should have continued its bond purchases at the current pace.

Mr Kocherlakota is considered one of the Fed’s “doves” – officials who are more concerned about unemployment than are “hawks”, who worry more about the risk of high inflation. At the September meeting, two “hawks” – presidents Charles Plosser of the Philadelphia Fed and Richard Fisher of the Dallas Fed - had dissented. Today, they voted for the statement.

The US economy has been benefiting from solid consumer and business spending, manufacturing growth and a surge in hiring that has reduced the unemployment rate to a six-year low. Still, the housing industry is still struggling, and global weakness poses a potential threat to US growth.

Fed chair Janet Yellen has stressed that while the unemployment rate is close to a historically normal level, other gauges of the job market remain a concern. These include stagnant pay; many part-time workers who can not find full-time jobs; and a historically high number of people who have given up looking for a job and are no longer counted as unemployed.

What’s more, inflation remains so low it is not even reaching the Fed’s long-term target. When inflation is excessively low, people sometimes delay purchases – a trend that slows consumer spending, the economy’s main fuel. The low short-term rates the Fed has engineered are intended, in part, to lift inflation.

The Fed’s decision to end its third round of bond buying had been expected. It has gradually pared the purchases from US $85 billion in Treasury and mortgage bonds each month to $15 billion.

And the Fed had said it would likely end the programme after its October meeting if the economy continued to improve.