WASHINGTON – The Federal Reserve chairman, Ben S. Bernanke, said Wednesday that the central bank intended to reduce its monetary stimulus later this year — and end the bond purchases entirely by the middle of next year — if unemployment continued to decline at the pace that the Fed expected.
Bernanke said that the Fed planned to continue the asset purchases until the unemployment rate fell to about 7 percent, the first time that the Fed has specified an economic objective for the bond-buying. The rate stood at 7.6 percent in May.
The Federal Reserve also struck notes of greater optimism about the economic recovery, saying in a statement released after a two-day meeting of its policy-making committee that the economy was expanding “at a moderate pace,” the job market was improving and risks to the recovery had “diminished since last fall.”
In a separate forecast, released at the same time, Fed officials predicted that the unemployment rate would decline more quickly than they had previously expected, falling to 6.5 percent to 6.8 percent by the end of 2014. They had predicted in March that the rate would be 6.7 percent to 7 percent.
Stocks fell on Wall Street after the Fed policy statement, with the Dow Jones industrial average closing down 1.35 percent, or 206 points, at 15,112. Investors sold on the Fed’s indications that it would reduce its stimulus efforts starting later this year.
The Fed said that it would continue for now to purchase $85 billion a month in Treasury securities and mortgage-backed securities, in addition to holding short-term interest rates near zero. Both policies are intended to ease financial conditions, to encourage economic activity and to increase the pace of job creation.
Two of the 12 members of the Federal Open Market Committee dissented from the decision. Esther George, president of the Federal Reserve Bank of Kansas City, reiterated her concern that the Fed was doing too much. James Bullard, president of the Federal Reserve Bank of St. Louis, broke with the majority for the first time this year, expressing concern about the sagging pace of inflation.
The Fed is trying to encourage job creation through a loose monetary policy, holding short-term interest rates near zero and purchasing $85 billion a month in mortgage-backed securities and Treasury securities.
But the economic damage of the recession remains largely unrepaired. Job growth is basically just keeping pace with population growth. The share of American adults with jobs has not increased in three years. At the same time, the Fed’s preferred measure of inflation has sagged to an annual pace 1.05 percent, the lowest level in more than 50 years, as the economy continues to operate below capacity.