Federal Reserve Chairman Ben S. Bernanke said the central bankmay start dialing down its unprecedented bond-buying program thisyear and end it entirely in mid-2014 if the economy finallyachieves the sustainable growth the Fed has sought since therecession ended in 2009.

The Federal Open Market Committee (FOMC) today left the monthlypace of bond purchases unchanged at $85 billion, while saying that“downside risks to the outlook for the economy and the labormarket” have diminished. Policy makers raised their growthforecasts for next year to a range of 3 percent to 3.5 percent andreduced their outlook for unemployment to as low as 6.5percent.

“If the incoming data are broadly consistent with this forecast,the committee currently anticipates that it would be appropriate tomoderate the pace of purchases later this year,” Bernanke said in apress conference in Washington. If later reports meet the Fed'sexpectations, “we will continue to reduce the pace of purchases inmeasured steps through the first half of next year, endingpurchases around mid-year.”

Stocks and Treasuries slid as Bernanke's comments raised theprospect of an end to the quantitative easing (QE) that has fueleda rally in financial markets and helped keep the world's largesteconomy expanding in the face of federal budget cuts, a slowdown inChina and a recession in the euro area.

“The Fed is out of the closet,” said Ward McCarthy, chieffinancial economist at Jefferies Group LLC in New York and a formerRichmond Fed economist. “They expect to end these QE purchases.Bernanke wasn't more specific than 'later this year,' butconnecting all the dots suggests he is thinking in the fourthquarter.”

Still, Bernanke tried to temper his message by saying that theFed has “no deterministic or fixed plan” to end assetpurchases.

“If you draw the conclusion that I just said that ourpolicies—that our purchases will end in the middle of next year,you've drawn the wrong conclusion, because our purchases are tiedto what happens in the economy,” he said. “If the economy does notimprove along the lines that we expect, we will provide additionalsupport.”

Open-Ended

Bernanke is expanding the Fed's balance sheet toward $4 trillionas he seeks to reduce a jobless rate that stands at 7.6 percentafter four years of economic growth. The Fed's open- endedpurchases, started last September and expanded in December, areunprecedented. In two previous rounds, it specified total purchasesin advance.

“I'm surprised at how badly the Fed wants to taper” to a slowerpace of purchases, said Julia Coronado, the chief economist forNorth America at BNP Paribas SA in New York and a former Fedeconomist. The Fed has “greater confidence than the average privatesector forecaster in the outlook.”

The economy will grow 1.9 percent in 2013 and 2.7 percent in2014, according to the median estimates in a Bloomberg survey. Theeconomy has not grown more than 3 percent over the course of 12months since the four quarters ending in June 2006.

The Fed also left unchanged its statement that it plans to holdits target interest rate near zero as long as unemployment remainsabove 6.5 percent and the outlook for inflation doesn't exceed 2.5percent.

Bernanke said policy makers might aim for a lower unemploymentthreshold before considering an increase in short-term interestrates.

“In terms of adjusting the threshold, I think that's somethingthat might happen,” he said in response to a question. “If it didhappen, it would be to lower it, I'm sure, not to raise it.” Hesaid an interest-rate increase is still “far in the future.”

Fed officials lowered their forecasts for the unemployment andinflation rates this year.

They now see a jobless rate of 7.2 percent to 7.3 percent,compared with 7.3 percent to 7.5 percent in their March forecasts.They predict the jobless rate will fall to 6.5 percent to 6.8percent in 2014.

“Labor market conditions have shown further improvement inrecent months, on balance, but the unemployment rate remainselevated,” the FOMC said in its statement. “Partly reflectingtransitory influences, inflation has been running below thecommittee's longer-run objective, but longer-term inflationexpectations have remained stable.”

Target Rate

Fifteen of 19 policy makers expect no increase in the federalfunds rate before 2015, according to today's forecasts. In March,14 policy makers had that expectation.

The Fed repeated that it will keep buying assets “until theoutlook for the labor market has improved substantially.” Bondpurchases will remain divided between $40 billion a month ofmortgage-backed securities and $45 billion a month of Treasurysecurities. The central bank also will continue reinvestingsecurities as they mature.

St. Louis Fed President James Bullard dissented for the firsttime in his tenure on the FOMC, saying the committee should “signalmore strongly its willingness to defend its inflation goal in lightof recent low inflation readings.”

Kansas City Fed President Esther George dissented for the fourthmeeting in a row, continuing to cite concern that keeping thebenchmark interest rate near zero risks creating “economic andfinancial imbalances,” including asset price bubbles.

Economists' Forecasts

No change in policy was expected at today's meeting. Fifty-eightof 59 economists in a June 4-5 Bloomberg Survey predicted thecentral bank would maintain the pace of purchases.

Inflation is providing little impetus for a tapering in bondpurchases. A gauge of consumer prices excluding food and energythat is watched by the Fed rose 1.1 percent in the year throughApril, matching the smallest gain since records started in 1960.Officials expect inflation to slowly rise in coming years, withcore prices climbing to 1.5 percent to 1.8 percent in 2014 and 1.7percent to 2 percent in 2015.

Speculation that an improving economy will prompt Fed policymakers to reduce bond buying last month triggered the biggest jumpin 10-year Treasury yields since December 2010.

About $2 trillion has been erased from the value of globalequities since Bernanke told U.S. lawmakers on May 22 that the FOMC“could” consider reducing bond purchases within “the next fewmeetings” if officials see signs of improvement in the labor marketand are convinced the gains can be sustained.

Mortgage Rates

Mortgage rates have soared the most in a decade on speculationthe Fed's purchases may slow. The interest rate on a 30-year fixedhome loan climbed to a 14-month high of 3.98 percent last week,according to data compiled by Freddie Mac.

Bernanke is nearing the end of his second four-year term, aperiod marked by unprecedented measures to battle the deepestrecession since the 1930s and then to keep the economy growing at apace that's brisk enough to put millions of unemployed Americansback to work.

The former Princeton professor cut the Fed's target interestrate almost to zero in December 2008 and has led the central bankin three rounds of large-scale asset purchases that have swelledthe Fed's balance sheet to a record $3.41 trillion.

President Barack Obama, in an interview on PBS this week,provided one of the clearest signals yet that Bernanke may notremain beyond the end of his term on Jan. 31. Bernanke “alreadystayed a lot longer than he wanted or he was supposed to,” Obamasaid.

Bernanke declined to discuss his future at today's pressconference.

“We just spent two days working on monetary policy issues and Iwould like to keep the debate, discussion, questions here onpolicy,” he said in response to a question. “I don't have anythingfor you on my personal plans.”

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