By Alister Bull and Pedro da Costa
WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke said on Wednesday the U.S. central bank expects to slow the pace of its bond purchases later this year and bring them to a halt around mid-2014, comments that weighed on stocks and pushed bond yields to a 15-month high.
The Fed expects moderate growth to lead to continuing healing in the job market as headwinds facing the economy ease, Bernanke said. He also said policymakers expect inflation to move back up toward their long-term 2 percent goal.
"The committee currently anticipates that it will be appropriate to moderate the monthly pace of purchases later this year, and if the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year," Bernanke said.
He made the statement at a news conference on the Fed's decision, announced earlier on Wednesday, to continue buying $85 billion in bonds per month given still-high unemployment.
After a two-day meeting, the Fed's policy-setting panel offered a more upbeat assessment of the risks facing the economy than they had after they last met in May. "The committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall," it said.
U.S. stocks fell sharply, the dollar rose and U.S. bond prices fell, lifting the yield on the benchmark 10-year Treasury note to levels not seen since March 2012, as traders saw Bernanke's remarks and the policy panel's statement as a clear step toward a reduction in the central bank's bond buying.
"The statement contained a notable pat on the back, saying the downside risks to the outlook for the economy and the labor market have diminished since the fall, which is a necessary precursor if they are going to get to the point where they do start to taper," said Greg McBride, senior financial analyst at Bankrate.com in New York.
Kansas City Fed President Esther George again dissented against the Fed's expansion of its support for the economy, expressing concern it could fuel financial imbalances and hurt the central bank's goal of keeping inflation contained.
But in a surprise, St. Louis Fed chief James Bullard also dissented, arguing the Fed should signal more strongly its willingness to defend its 2 percent goal for inflation, although the statement did not indicate whether he pushed for stepping up the pace of bond purchases.
For graphic on rate projections: click http://link.reuters.com/fak98t
RATE RISE NOT SEEN UNTIL 2015
The Fed has held overnight interest rates near zero since December 2008 while more than tripling its balance sheet to around $3.3 trillion with its bond buying.
In its current and third installment of so-called quantitative easing, it is purchasing $40 billion in mortgage-backed securities and $45 billion in longer-term U.S. government securities each month.
Economists expect rates to stay on hold until 2015, but the view in financial markets of the lift-off date had shifted forward since Fed Chairman Ben Bernanke fired up speculation last month that the central bank could soon curb its asset buying.
The Fed repeated on Wednesday that it will not raise interest rates until unemployment hits 6.5 percent or lower, provided that the outlook for inflation stays under 2.5 percent. The jobless rate was 7.6 percent in May.
In his news conference, Bernanke made clear that threshold was merely for considering a rate hike, not a trigger for necessarily making one. In fresh quarterly projections, 14 of the 19 members of the Fed's policy panel said they did not think it would be appropriate to raise rates until some time in 2015.
In a sharp downgrade, the Fed forecast the PCE price index, its preferred gauge of the price pressures facing consumers, would rise just 0.8 to 1.2 percent this year. However, it saw inflation heading back to 1.4 to 2.0 percent in 2014 and 1.6 to 2.0 percent in 2015.
Low inflation could allow the Fed to keep rates lower for longer.
Furthermore, in a slight upgrade to their projections, officials forecast unemployment to average 6.5 to 6.8 percent in the fourth quarter of next year, and 5.8 to 6.2 percent in the final three months of 2015.
They forecast U.S. economic growth of between 3.0 and 3.5 percent next year and 2.9 to 3.6 percent in 2015.
Analysts think U.S growth slowed a bit in the second quarter of this year in the face of fiscal drag from government spending cuts and higher taxes, and recent readings from the economy have been mixed.
The labor market, a central focus of Fed efforts to boost growth, has notched steady improvement with 175,000 new jobs added in May. But U.S. manufacturers have been hurt by softer overseas demand, and inflation has fallen even further beneath the Fed's goal.
The consumer price index was up 1.4 percent in May from a year ago. But the PCE price index rose just 0.7 percent in the 12 months through April, the most recent reading.
(Writing by Alister Bull; Additional reporting by Ann Saphir; Editing by Tim Ahmann and Andrea Ricci)
