Federal Reserve Chairman Ben Bernanke said that the Fed may begin to pull back its stimulus if the economy continues to improve through the end of the year, adding that the unemployment rate will likely be 7 percent when the Fed begins to drawdown its stimulus.
The Federal Reserve won't be making an immediate changes to its $85 billion a month bond purchasing stimulus program, but if the agency's expectations hold true there could be a change in policy announced as early as this fall.
The Fed, which has injected trillions of dollars into the slowly recovering American economy, made an announcement on its intentions in three parts on Wednesday. This is the Fed's most closely watched announcement since a third round of its bond purchasing program, or "quantitative easing" in September last year.
During a press conference on Thursday afternoon, Bernanke said the Federal Reserve may end its bond purchases in mid-2014 if its economic forecasts are correct.
The Federal Reserve said in its statement today that economic activity has been "expanding at a moderate pace" since its monetary policy-making group, the Federal Open Market Committee, met in May.
Stock investors are worried that an end to the stimulus program will mean a swoon in equity prices. Bond investors fear that higher interest rates will depress the value of their holdings. When interest rates go up, the value of bonds declines.
The agency lowered its unemployment forecasts for this year to 7.25 percent, slightly better than its previous projection of up to 7.5 percent. Its forecast for the unemployment rate next year is 6.65 percent.
The Labor Department reported earlier this month that the unemployment rate for May rose to 7.6 percent with the addition of 175,000 jobs.
After its two-day meeting, the committee decided to keep the target rate for the federal funds rate at zero to 1/4 percent. Between the next year or two years, inflation is projected to be more than a half percentage point above the committee's two percent long-term goal, the Fed said.
Bernanke held a press conference expanding upon the Federal Reserve's statement and economic outlook. But he didn't reveal anything about when he might step down as Federal Reserve chairman when a reporter asked about his future.
"I don't have anything for you on my personal plans," Bernanke said at the press conference.
He is widely expected to leave his post at the end of his term later this year. President Obama essentially confirmed this departure in an interview with PBS' Charlie Rose earlier this week.
Appointed by President George W. Bush, Bernanke became chairman of the Federal Reserve in Feb. 2006 and began his second term in Feb. 2010 after he was re-appointed by President Obama. Bernanke's second term as chairman ends Jan. 31, 2014 and his term as a board member ends on Jan. 31, 2020.
The Federal Open Market Committee consists of twelve people, consisting of members of the Board of Governors of the Federal Reserve System and Reserve Bank presidents.
The Fed's actions greatly impact the U.S. economy for investors, business owners, consumers and homeowners. Interest rates on loans, stock and bond markets, all react to Fed policy.
"The last thing the Fed wants to do is cause rates to move quickly enough to choke off recovery," says Gus Faucher, senior economist with PNC financial.