Fed Outlines Timeline for Winding Down Stimulus

Mr. Bernanke said that the Fed planned to continue the asset purchases until the unemployment rate fell to about 7 percent, the first time that the Fed has specified an economic objective for the bond-buying. The rate stood at 7.6 percent in May.

The Federal Reserve also struck notes of greater optimism about the economic recovery, saying in a statement released after a two-day meeting of its policy-making committee that the economy was expanding “at a moderate pace,” the job market was improving and risks to the recovery had “diminished since last fall.”

In a separate forecast released at the same time, Fed officials predicted that the unemployment rate would decline more quickly than they had previously expected, falling to 6.5 percent to 6.8 percent by the end of 2014. They had predicted in March that the rate would be 6.7 percent to 7 percent.

Stocks fell on Wall Street after Mr. Bernanke’s remarks, with the Dow Jones industrial average ending down 1.4 percent, or more than 200 points. The broader Standard & Poor’s 500-stock index also lost 1.4 percent. Investors sold on his indications that the Fed would reduce its stimulus efforts starting later this year.

The Fed said that it would continue for now to purchase $85 billion a month in Treasury securities and mortgage-backed securities, in addition to holding short-term interest rates near zero. Both policies are intended to ease financial conditions, to encourage economic activity and to increase the pace of job creation.

Two of the 12 members of the Federal Open Market Committee dissented from the decision. Esther George, president of the Federal Reserve Bank of Kansas City, reiterated her concern that the Fed was doing too much. James Bullard, president of the Federal Reserve Bank of St. Louis, broke with the majority for the first time this year, expressing concern about the sagging pace of inflation.

The improved outlook helps to explain why Fed officials have increasingly suggested that they may seek to reduce the pace of asset purchases in the coming months. The Fed has said that it will stop buying bonds well before it begins to raise interest rates.

While the vast majority of the 19 Fed officials who participate in policy continue to expect a first rate increase in 2015, 13 said they expected the Fed to raise its benchmark short-term rate at least to 1 percent by the end of 2015, implying that increases would begin relatively early in the year. In March, only 10 officials forecast that rates would hit 1 percent by the end of 2015.

The Fed’s forecasts have consistently overestimated the strength of the economic recovery since the end of the recession. The central bank has suspended its stimulus efforts twice in recent years, only to find that it needed to do more. Officials have said that they are eager to avoid repeating those mistakes. But there is growing optimism inside the central bank that the Fed is finally doing enough.

The Fed is trying to encourage job creation through a loose monetary policy, holding short-term interest rates near zero and purchasing $85 billion a month in mortgage-backed securities and Treasury securities.

Economic conditions have improved modestly since the Fed began this latest round of asset purchases last September. The economy has added about 197,000 jobs a month, on average, and the unemployment rate has fallen slightly to 7.6 percent in May from 7.8 percent in September. The impact of federal spending cuts so far has been smaller than many forecasters, including the Fed, had expected.

But the economic damage of the recession remains largely unrepaired. Job growth is basically just keeping pace with population growth. The share of American adults with jobs has not increased in three years. At the same time, the Fed’s preferred measure of inflation has sagged to an annual pace 1.05 percent, the lowest level in more than 50 years, as the economy continues to operate below capacity.