Fed ends bond-buying program, citing improved economy

WASHINGTON - The Federal Reserve cited an improving economy Wednesday as it ended its landmark bond-buying program and pointed to gains in the job market - a key condition for an eventual interest rate hike.

The Fed did reiterate its plan to maintain its benchmark short-term rate near zero "for a considerable time." Most economists predict it won't raise that rate before mid-2015. The Fed's benchmark rate affects rates of many consumer and business loans.

But in a statement ending a policy meeting Wednesday, the Fed noted the job market was strengthening. Its statement drops a previous reference to "significant" in referring to an "underutilization" of available workers.

Instead, the Fed said the excess of would-be job holders was "gradually diminishing." It also noted solid hiring gains and a lower unemployment rate, now 5.9 percent. One of the Fed's major goals is to achieve maximum employment, which it defines as an unemployment rate between 5.2 percent and 5.5 percent.

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

The Fed repeated language that the likelihood of inflation running persistently below its 2 percent target rate had diminished, even though inflation is being restrained by lower energy prices and other factors. The Fed noted, though, that investors foresaw even lower inflation.

On balance, economists saw the Fed's statement as showing less concern about unusually low inflation, which has helped delay a rate increase. Some analysts said the market reaction Wednesday suggested investors saw the Fed statement as at least setting the stage for rate hikes next year.

Michael Hanson, senior economist at Bank of America Merrill Lynch noted that although the Fed kept its "considerable time" phrasing, it added language stressing any rate increase would hinge on the economy's health. Previously, many analysts had interpreted the "considerable time" phrase to mean the Fed wouldn't raise rates for a specific period after it ended its bond purchases.

The Fed statement was approved, 9-1. The one dissent came from Narayana Kocherlakota, president of the Fed's regional bank in Minneapolis. He contended the Fed should have signaled its intention to maintain a record-low benchmark rate until the inflation outlook reached the central bank's 2 percent target. And he argued that the Fed should have continued its bond purchases at the current pace.

Kocherlakota is considered one of the Fed's "doves" - officials 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 - dissented. On Wednesday, they voted for the statement.

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

Fed chair Janet Yellen has stressed that although the unemployment rate is close to a historically normal level, other gauges of the job market remain a concern. Those include stagnant pay, many part-time workers who can't 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.

The Fed's decision to end its third round of bond buying had been expected. It has gradually pared the purchases from $85 billion in Treasury and mortgage bonds each month to $15 billion. And the Fed had said it would likely end the program after its October meeting if the economy continued to improve.

Even with the end of new purchases, the Fed's investment holdings stand at $4.5 trillion - more than $3 trillion higher than when the bond purchases were launched in 2008 at the height of the financial crisis. The Fed has said it won't begin selling its holdings until after it starts raising short-term rates.