By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) — The Federal Reserve, worried that improvement
in the unemployment rate has stalled, announced a third round of bond
purchases on Thursday in an effort to bring down long-term interest
rates and spur economic growth.
The Fed said it would buy mortgage-backed securities at a pace of $40 billion per month.
The Federal Open Market Committee, which ended a two-day meeting on
Thursday, said it was concerned that, without the action, “economic
growth might not be strong enough to generate sustained improvement in
labor-market conditions.”Information received since the Federal Open Market
Committee met in August suggests that economic activity has continued to
expand at a moderate pace in recent months. Growth in employment has
been slow, and the unemployment rate remains elevated. Household
spending has continued to advance, but growth in business fixed
investment appears to have slowed. The housing sector has shown some
further signs of improvement, albeit from a depressed level. Inflation
has been subdued, although the prices of some key commodities have
increased recently. Longer-term inflation expectations have remained
stable.
Consistent with its statutory mandate, the Committee seeks to foster
maximum employment and price stability. The Committee is concerned that,
without further policy accommodation, economic growth might not be
strong enough to generate sustained improvement in labor market
conditions. Furthermore, strains in global financial markets continue to
pose significant downside risks to the economic outlook. The Committee
also anticipates that inflation over the medium term likely would run at
or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that
inflation, over time, is at the rate most consistent with its dual
mandate, the Committee agreed today to increase policy accommodation by
purchasing additional agency mortgage-backed securities at a pace of $40
billion per month. The Committee also will continue through the end of
the year its program to extend the average maturity of its holdings of
securities as announced in June, and it is maintaining its existing
policy of reinvesting principal payments from its holdings of agency
debt and agency mortgage-backed securities in agency mortgage-backed
securities. These actions, which together will increase the Committee’s
holdings of longer-term securities by about $85 billion each month
through the end of the year, should put downward pressure on longer-term
interest rates, support mortgage markets, and help to make broader
financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and
financial developments in coming months. If the outlook for the labor
market does not improve substantially, the Committee will continue its
purchases of agency mortgage-backed securities, undertake additional
asset purchases, and employ its other policy tools as appropriate until
such improvement is achieved in a context of price stability. In
determining the size, pace, and composition of its asset purchases, the
Committee will, as always, take appropriate account of the likely
efficacy and costs of such purchases.
To support continued progress toward maximum employment and price
stability, the Committee expects that a highly accommodative stance of
monetary policy will remain appropriate for a considerable time after
the economic recovery strengthens. In particular, the Committee also
decided today to keep the target range for the federal funds rate at 0
to 1/4 percent and currently anticipates that exceptionally low levels
for the federal funds rate are likely to be warranted at least through
mid-2015.
Voting for the FOMC monetary policy action were: Ben S. Bernanke,
Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P.
Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy
C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.
Voting against the action was Jeffrey M. Lacker, who opposed additional
asset purchases and preferred to omit the description of the time period
over which exceptionally low levels for the federal funds rate are
likely to be warranted.”
“A weak job market should concern every American,” Fed Chairman Ben Bernanke said at his press conference.
In addition to bond purchases, the Fed said it intends to keep the
benchmark short-term interest rate, known as the federal funds rate, at
nearly zero until mid-2015. The prior guidance on the first rate
increase had been late 2014. The guidance now extends well beyond end of
Bernanke’s term in early 2014, although he could be appointed to
another term by whoever is president. The central bank has kept the
federal funds rate at nearly zero since December 2008.
The Fed said it would keep low rates in place for a “considerable time,” even after the economic recovery strengthens.
“Even after the economy starts to recover more quickly, even after the
unemployment rate begins to move down more sizably, we are not going to
rush to tighten policy. We are going to give it time to make sure the
recovery is well established,” Bernanke commented.
“The Fed is being aggressive,” said Avery Shenfeld, chief economist for
CIBC in Toronto. “They are taking action because every quarter that goes
by, they haven’t gotten the growth that they forecast will one day
come.”
U.S. stocks
DJIA
+1.55%
spiked after the Fed statement was released. The U.S. dollar turned up and 10-year Treasury prices turned down.
Reuters
The committee’s vote was 11 to 1. Jeffrey Lacker, president of the
Federal Reserve Bank of Richmond, dissented, as he has at every meeting
this year. The Fed took the aggressive action out of a growing concern
for the economic outlook, especially the anemic labor market.
A key element of the Fed’s statement was that the central bank will keep
buying until more jobs are created, possibly at a faster rate.
“If the outlook for the labor market does not improve substantially, the
committee will continue its purchases of agency mortgage-backed
securities, undertake additional asset purchases and employ its other
policy tools as appropriate until such improvement is achieved in a
context of price stability,” the FOMC said.
Bernanke added that the Fed’s asset purchases would not last until the
labor market was back to full employment: “We’re just trying to get the
economy to move in the right direction, make sure that we don’t stagnate
at high levels of unemployment.”
“They are saying that they will not pause until their work is done,” CIBC’s Shenfeld said.
Despite holding interest rates at zero for more than three and a half
years, and the central bank buying $2.3 trillion in assets, the
unemployment rate has been stuck above 8% since early 2009. There are
12.5 million unemployed workers.
Economists and even Fed officials disagree on whether further asset purchases will have any lasting effect on the economy.
Shenfeld of CIBC compared the Fed move to a placebo. “They are saying,
‘Take these two bond-buying programs and you will feel better in the
morning,’ ” he said. “The reality is that the weapons they have are not
particularly powerful, but they might as well be used.”
Fed hawks are worried that core consumer-price inflation is running at a
2.1% rate over the past 12 months despite the weak economy. In
response, Bernanke said the Fed was ready to combat any inflation
outbreak. “The Fed has both the tools and the will to act at the
appropriate time to avoid any emerging threat to price stability,” he
remarked.
He addressed the continued concern that savers are being hurt by the
Fed’s drive to push down rates. Bernanke noted the Fed was aware that
savers were hurt by the low rates, but said everyone would ultimately
benefit if the economy picked up steam as a result of the purchases.
The Fed chairman also said the “broad center” of the Fed supported the
move to QE3, and that he was not concerned with opposition to the
program from inside or outside the Fed.
“Some people think it is more effective than others. There is going to
be disagreement. I do think it has enough force to help nudge the
economy in the right direction,” he added.
Economists expect sluggish growth for the last six months of the year.
The European sovereign-debt and banking crises are holding the economy
back.
There is also mounting concern over a stalemate over U.S. fiscal policy.
Deep spending cuts and higher taxes will take effect Jan. 1 unless the
Republican and Democrats in Congress agree to change current law.
Household incomes sink to '95 level
The income of the typical U.S. family has fallen to levels last seen in 1995. (Photo: Reuters)
St. Louis Fed President James Bullard said in an interview with
MarketWatch late last month that the end dates of the first two rounds
of asset purchases damaged their effectiveness.
Republicans have been opposed to the Fed’s asset purchases as government
intervention in the economy. On Wednesday, vice presidential candidate
Paul Ryan said he thought they would do “more harm than good.”
President Barack Obama generally has not commented on Fed policy.
Bernanke said that prior rounds of quantitative easing had worked and
could continue to be effective. “Overall … a balanced reading of the
evidence supports the conclusion that central-bank securities purchases
have provided meaningful support to the economic recovery while
mitigating deflationary risks.” The costs of the program also “appeared
manageable.”
The first two rounds of asset purchases may have increased private
payroll employment by more than 2 million jobs, according to the Fed
chief.
Since the recession ended in June 2010, the economy has added a total of 2.8 million private sector and government jobs.
In its statement, the FOMC said that the economy is growing at a
moderate pace. Business spending appeared to have slowed. Housing was
showing further signs of improvement but from a depressed level.
The FOMC said that inflation “has been subdued,” even though some key commodities have increased recently.
The Fed said that strains in global financial markets continue to pose significant downside risks to the outlook.
The central bank will continue its Operation Twist plan to replace
short-term securities on its balance sheet with long-term bonds. It will
also maintain its existing policy of reinvesting principal payments in
MBS.
The actions will together increase the Fed’s holding of longer-term
securities by about $85 billion each month through the end of the year,
the Fed added.
The purchases “should put downward pressure on longer-term interest
rates, support mortgage markets and help to make broader financial
conditions more accommodative,” the Fed said.
The next decision will come in December when it must decide whether to
continue the purchases at the $40 billion per-month pace or ramp them up
as the Twist program ends.
Asked to define what the specific conditions would be that would cause
the Fed to stop, Bernanke replied: “Ongoing, sustained improvement in
the labor market.”
“It is not a specific number we have in mind. But, you see the last six months? That isn’t it,” he said.
From Marketwatch and it was collected by Greg Robb is a senior reporter for MarketWatch in Washington.
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