To Reassure Investors, Fed Stresses It Will Not End Stimulus

WASHINGTON — Each time in recent years that the Federal Reserve has paused in its efforts to stimulate the economy, it has come to regret the decision as premature. Its leading officials say the recovery has been slower as a consequence of those pauses. It is a mistake they do not want to repeat.

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Ben S. Bernanke, chairman of the Federal Reserve, said there would be a risk to the recovery in letting interest rates rise.

When the Fed’s policy-making committee meets on Tuesday and Wednesday, its members are likely to spend a lot of time talking about the potential costs of the current stimulus campaign. Then the Fed’s chairman, Ben S. Bernanke, will probably seek to reassure investors that the Fed plans to press on.

The central bank is buying $85 billion a month in Treasury and mortgage-backed securities because it wants unemployment to fall more quickly. While recent economic data suggests that growth is quickening, Mr. Bernanke has said that the situation remains unacceptable and that the pace of progress is uncertain.

Mr. Bernanke and the Fed’s vice chairwoman, Janet L. Yellen, “have been abundantly clear in recent commentary that the improvement in the labor market to date falls far short of what they will need to see before reducing monetary policy accommodation,” Joseph LaVorgna, chief United States economist at Deutsche Bank, wrote last week in a note to clients.

Also, the federal government has just embarked on another round of spending cuts, known as sequestration, and the extent of the resulting drag on the economy may not be evident for several months.

“The Fed will not take overt steps to scale back its asset purchases any time soon,” Lou Crandall, chief economist at Wrightson ICAP, a New York-based financial research firm, wrote last week. “The Fed is not going to take any chances until it is sure that we have avoided another spring/summer swoon.”

The central bank has said that it plans to hold short-term interest rates near zero at least as long as the unemployment rate remains above 6.5 percent. It was 7.7 percent in February. The asset purchases are intended to hasten the arrival of that moment by further reducing long-term borrowing costs for businesses and consumers.

Mr. Bernanke built a broad consensus among Fed officials last year in favor of taking both steps, and analysts say that supporters of the policy remain firmly in the majority of the Fed’s 12-member Federal Open Market Committee. Only one official dissented at the most recent meeting in January.

But Fed officials who disagree with the policy, including some who do not hold votes on the committee this year, have become increasingly vocal in their criticisms. And among officials who support the purchases, there is disagreement about how much longer the Fed should keep its foot on the gas.

The focus of those concerns has shifted from the remote threat of inflation to the possibility that low interest rates could destabilize financial markets, in part by encouraging investors to take outsize risks.

Such concerns can dilute the impact of the Fed’s efforts by causing investors to doubt how much longer rates will remain low. In response, Mr. Bernanke and other supporters of the current policies have tried in recent weeks to persuade markets that the purchases will continue because the benefits far outweigh the potential costs. Indeed, Mr. Bernanke argued recently that pulling back could pose even larger risks to stability by weakening the economy.

“In light of the moderate pace of the recovery and the continued high level of economic slack, dialing back accommodation with the goal of deterring excessive risk-taking in some areas poses its own risks to growth, price stability and, ultimately, financial stability,” he said this month. “Indeed, as I noted, a premature removal of accommodation could, by slowing the economy, perversely serve to extend the period of low long-term rates.”

In seeking to persuade markets that it plans to press forward, the Fed must also contend with evidence that the economy is gaining strength. Fed officials projected in December that the economy would expand 2.8 percent to 3.2 percent this year, the fastest growth since the recession. Analysts expect an updated forecast on Wednesday to be modestly more optimistic.

The Fed has said that it will continue to stimulate the economy for an unusually extended period, even as the recovery gains strength. Since the benefits of that policy depend on its credibility, it is searching for ways to communicate more clearly with investors so that expectations of its eventual retreat do not become a premature drag on growth.

“At this stage in the business cycle, central bankers obsess that market participants will expect policy tightening to come sooner and more sharply than is consistent with sustained economic expansion,” said Vincent R. Reinhart, chief United States economist at Morgan Stanley.