Bond Purchases by Fed Will Continue, at Least for Another Month

As expected, the Fed’s policy-making committee voted to press ahead for now with its campaign to increase job creation. And its statement said nothing about how much longer it would continue to add $85 billion a month to its holdings of mortgage-backed securities and Treasury securities. But the Fed left its economic outlook basically unchanged, suggesting that the central bank still intended to reduce the volume of its purchases later this year.

The statement, issued after a regular two-day meeting of the Federal Open Market Committee, acknowledged the weak pace of growth during the first half of the year, which it described as “modest” rather than “moderate” — the words are synonymous in English but distinct in the Fed’s carefully calibrated lexicon, suggesting an even more lackluster economic performance. But it maintained the Fed’s forecast that “economic growth will pick up from its recent pace” in the coming months, driving job creation.

The statement also repeated language first introduced after the Fed’s previous meeting, in June, that “the committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall,” when the Fed began this latest push aimed at increasing the pace of growth.

Analysts said they expected the committee to cut back at its next meeting in mid-September. Dean Maki, chief United States economist at Barclays Capital, said the statement was “on the dovish side” because of its references to slower growth, rising mortgage rates and low inflation. Nonetheless, he added, “We continue to expect the F.O.M.C. to taper the asset purchase program in September, provided that the next two employment reports are reasonably strong.”

The committee had little time to grapple with the implications of the latest economic data. The government announced earlier Wednesday that the economy expanded at an annual rate of 1.7 percent in the second quarter, better than economists had expected but below the pace that Fed officials regard as necessary to create enough jobs to bring down the unemployment rate.

The Fed repeated its stark assessment that “fiscal policy is restraining economic growth.” It also noted that “mortgage rates have risen somewhat,” a new check on the economy that is at least partly of the Fed’s own creation.

The average interest rate on a 30-year fixed-rate mortgage rose to 4.37 percent in July from 3.54 percent in May, according to a survey conducted by Freddie Mac. But that increase is only partly the result of investor uneasiness about the Fed’s plans; it also reflects an improved economic outlook. And that improved outlook, in turn, is mitigating the impact of the rate increases.

David Hall, president of Shore Mortgage in Troy, Mich., said that the higher rates had cut into demand for refinancing, but that demand for mortgages to buy a home remained strong. “People understand the historical context, that these are still really low rates, and coupled with all the news about home values rising, there’s still a lot of excitement about buying,” he said. “That excitement has overshadowed the rate increases a little bit.”

The Fed has also become more concerned about the sluggish pace of inflation. Prices rose at an annual pace of just 0.8 percent in the second quarter, according to the Fed’s preferred measuring stick, a measure of inflation compiled by the Bureau of Economic Analysis — well below the 2 percent annual pace that the Fed considers healthy. Low inflation can cause problems, although Mr. Bernanke recently noted that the reasons were “hard to explain to your uncle.” The primary cause for concern is the risk that prices will begin to fall, which can plunge the economy into a debilitating cycle of deflation as prospective buyers wait for prices to fall even further.

James Bullard, president of the Federal Reserve Bank of St. Louis, chided his fellow officials for underplaying this risk at the committee’s June meeting. This time the Fed noted the risk in the statement but maintained its official view that the pace of price increases was likely to rise.

Fed Support Lifted Wall St. To Best Month Since January

After a day of stalled rallies, the stock market closed out July with its best monthly gain since January.

The Standard & Poor’s 500-stock index ended the month 4.95 percent higher. That was the biggest increase since January, when it rose 5.04 percent. The Dow Jones industrial average also had its best month since January.

Markets surged in July after the Federal Reserve chairman, Ben S. Bernanke, assured investors that the central bank would not curb its stimulus program until the economy was strong enough. The Fed is buying $85 billion of bonds a month to keep down interest rates to encourage borrowing and hiring.

On Wednesday, the Fed reaffirmed its commitment to support the economy in a statement released after the end of a two-day meeting. The central bank dropped hints that it might need to maintain its stimulus, and slightly downgraded its assessment of economic growth in the United States from “moderate” to “modest.”

That initially gave stocks a boost, pushing the S.& P. 500 within two points of breaching 1,700 for the first time, in afternoon trading. But the rally faded in the final hour, leaving the S.& P. flat at the end of the day.

Given the market’s big gains in July, stocks may struggle to climb further in the coming months, said Philip J. Orlando, chief equity market strategist at Federated Investors. “I would not be the least bit surprised to see some modest consolidation,” he said.

Stocks started higher on Wednesday after the government said that the economy grew at an annual rate of 1.7 percent in the second quarter as businesses spent more and the federal government cut less spending. Economists had expected growth of 1 percent, according to the data provider FactSet.

There was also an encouraging report on hiring ahead of the government’s monthly jobs survey due Friday. Businesses created a healthy 200,000 jobs in July, the payroll company Automatic Data Processing said, as companies hired at the fastest pace since December.

The S.& P. 500 ended little changed at 1,685.73. The Dow Jones industrial average fell 21.05 points, or 0.1 percent, at 15,499.54. The Nasdaq composite index rose 9.90 points, or 0.3 percent, to 3,626.37.

In the bond market, investors anticipated that the Fed’s slightly weaker assessment of the economy would imply a longer period of bond purchases. The price of the 10-year Treasury note rose 5/32, to 92 26/32, while its yield fell to 2.59 percent from 2.61 percent late Tuesday.

A Calm Close to a Volatile Month

Given the wild trading of late, it was a calm close to the month.

After flitting between tiny gains and losses most of Friday, the stock market closed mostly lower, a peaceful end to the most volatile month in nearly two years.

“It’s a dull Friday,” said Gary Flam, a stock manager at Bel Air Investment Advisors. A bull market, he added, is “rarely a straight march up.”

The Standard & Poor’s 500-stock index ended its bumpy ride in June down 1.5 percent, the first monthly loss since October. The index still had its best first half of a year since 1998.

Investors seemed unsure how to react to recent statements by Federal Reserve officials about when the central bank might end its support for the economy.

Mixed economic news on Friday added to investor uncertainty after big stock gains. An index of consumer confidence was up, but a gauge of business activity in the Chicago area plunged.

“Investors don’t know what to make of the news,” said John Toohey, vice president for stock investments at USAA Investment Management. “I wouldn’t be surprised to see more ups and downs.”

The S.& P. 500 closed down 6.92 points, or 0.4 percent, to 1,606.28. The Dow Jones industrial average fell 114.89 points, or 0.8 percent, to 14,909.60. The Nasdaq composite index rose 1.38 points, or 0.04 percent, to 3,403.25.

Stocks have jumped around in June. By contrast, the first five months of the year were mostly calm, with small but steady gains as investors bought on news of higher home prices, record corporate earnings and an improving jobs market.

By May 21, the S.& P. 500 had climbed to a record 1,669, up 18 percent for the year. The Fed chairman, Ben S. Bernanke, spoke the next day and prices began seesawing.

Investors have long known that the central bank would eventually pull back from its bond purchases, which are intended to lower interest rates and get people to borrow and spend more. Last week, Mr. Bernanke got more specific about the timing, saying the Fed could start purchasing fewer bonds later this year and stop buying them completely by the middle of next year if the economy continued to strengthen.

Investors dumped stocks, but then had second thoughts this week as other Fed officials stressed that the central bank would not pull back on its support soon.

Bonds have also been on a bumpy ride in recent weeks, mostly down.

The prospect of fewer purchases by the Fed sent investors fleeing from all sorts of bonds — municipals, United States Treasury securities, corporate bonds, foreign government debt and high-yield bonds. Investors withdrew a record $23 billion from bond mutual funds in the five trading days that ended Wednesday, according to Bank of America Merrill Lynch.

Bond yields, which move in the opposite direction of bond prices, have rocketed. On Friday, the benchmark 10-year Treasury note fell 3/32 to 93 19/32, bringing the yield up to 2.49 percent, from 2.47 percent late Thursday. Last month, the yield was as low as 1.63 percent.