WASHINGTON The Federal Reserve Board on Wednesday took yet another incremental step to pare down its stimulus program to $25 billion.
Amid signs of stronger second quarter economic growth and improvements in the labor market, policymakers agreed to stay the course in reducing the pace of the central bank's monthly purchases of mortgage and Treasury bonds following its two-day Federal Open Market Committee meeting.
Although the unemployment rate declined further, participants warned that there appears to remain a "significant underutilization of labor resources." They also pointed to a still "slow" housing sector and how fiscal policy has continued to restrain growth even as headwinds have diminished.
"The committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions," according to the statement.
Policymakers were expected to move forward with cutting its monthly bond buying program, while continuing to maintain the federal funds rate near zero. Starting in August, the Fed will begin to purchase $10 billion and $15 billion of mortgage-backed securities and longer-term Treasury securities, respectively.
Since January, the Fed has been taking gradual steps to end its economic stimulus program following each of its policy meetings at $10 billion a clip. The central bank plans to halt its unprecedented quantitative easing program this October.
Policymakers have thus far taken "measured steps" in moving ahead with the wind down of its QE program as long as incoming data has continued to broadly support participants' expectations. The committee again reiterated that its asset purchases were not on a "preset course" and any policy decisions will be based on the committee's outlook for the labor market and inflation.
Fed officials agreed to continue to keep a key benchmark rate at a historic low. The first rate hike is not expected any earlier than mid-2015. Policymakers have said they will use a wide range of factors when making a decision to lift rates, including labor market conditions, inflation expectations and other financial developments.
Fed Chair Janet Yellen has been consistent in making the case that it is "appropriate" to maintain near zero interest rates for a "considerable time," even after the asset purchase program winds down. The Fed has kept its benchmark rate near zero since 2008.
"In determining how long to maintain the current 0 to ¼ percent target range for the federal funds rate, the committee will assess progress both realized and expected toward its objective of maximum employment and 2 percent inflation," according to the statement.
Earlier this month, Yellen endorsed policymakers' decision to keep interest rates low, but suggested that the benchmark rate could be lifted sooner if the economy improves at a faster pace.
"If the labor market continues to improve more quickly than anticipated by the [Fed]," she told lawmakers at a Senate Banking Committee hearing on July 15. "Then increases in the federal-funds rate target likely would occur sooner and be more rapid than currently envisioned.
But Yellen, still cautious, shared concerns tied to labor force participation and sluggish wage growth as signs of "significant slack" in the job market. That's why she stressed the Fed should not be fooled as it has in the past of "false dawns" during this economic recovery.
"We need to be careful to make sure the economy is on a solid trajectory before we consider raising interest rates," she said at the hearing.
Most policymakers expect rates to be lifted in 2015 based on the latest set of economic projections with a median interest rate of 1.125%. In the longer-run, policymakers expect the median interest rate to be 3.75%.
Wednesday's decision was supported by nearly every member of the FOMC with the exception of Philadelphia Fed President Charles Plosser. He objected to the language contained in the statement tied to when rates may lift, given that that such "language is time-dependent and does not reflect the considerable economic progress" that has been achieved.