By Steven K. Beckner
WASHINGTON (MNI) – The year is ending much as it began for the
Federal Reserve — with the federal funds rate being held near zero “for
an extended period” and with the Fed buying assets aggressively in an
effort to minimize long-term interest rates.
There were no real surprises as the Fed’s policymaking Federal Open
Market Committee held its final meeting of 2010 and left monetary policy
essentially unchanged as it looked ahead to 2011.
The FOMC further prolonged its now two-year-old policy of holding
the funds rate “exceptionally low … for an extended period,” and it
reaffirmed its plan to continue buying massive amounts of U.S. Treasury
bonds in a so-far spectacularly unsuccessful effort to hold down
long-term rates.
When the FOMC approved the resumption of so-called “quantitative
easing” on Nov. 3, it said it would “regularly review” the program and
“adjust” it “as needed.”
But the initial review did not lead to any change in the size or
pace of asset purchases. Until further notice, the plan remains that it
will buy $600 billion of longer-term Treasury securities by the end of
the second quarter next year — subject to further review.
Fed Chairman Ben Bernanke, among other officials, has made clear he
is prepared to expand “QE2″ if economic and financial conditions seem to
require it. They haven’t ruled out reducing the magnitude of purchases,
but that seems much less likely, given the Fed’s oft-expressed
dissatisfaction with high unemployment and low inflation.
The FOMC does not detail what might cause it to “adjust” its asset
buys up or down, but officials have made clear that it will depend on
the “efficacy” of asset purchases and on how the economic picture
unfolds.
If economic growth remains too sluggish to reduce unemployment,
there will likely be strong support for expanding QE. But that decision
could be complicated by untoward developments, such as an increase in
inflation expectations or a deterioration in the value of the dollar
that drove up long-term interest rates counterproductively.
So far, financial conditions have not cooperated with the Fed.
Since QE2 was launched, interest rates have risen rather than fallen, as
the Fed hoped. And the dollar has largely strengthened, contrary to Fed
expectations.
In explaining the FOMC’s decision to push ahead with QE and with an
“extended period” of near zero short-term rates, the Fed gave much the
same justifications as it did in early November. Once again, the
ultra-easy policy stance was couched in terms of the failure of the
economy to fulfill the Fed’s “dual mandate” of full employment and price
stability.
If anything, there was even more of an emphasis on unemployment,
which was reported to have risen from 9.6% to 9.8% since the FOMC last
met. That shouldn’t be a surprise either, given the heavy emphasis which
Bernanke and others have put on joblessness in multiple public
statements since Nov. 3.
“Information received since the Federal Open Market Committee met
in November confirms that the economic recovery is continuing, though at
a rate that has been insufficient to bring down unemployment,” the Fed
said, employing new language that highlights the Committee’s paramount
concern about the weak labor market.
The rest of the statement tracks the previous one.
“Household spending is increasing at a moderate pace, but remains
constrained by high unemployment, modest income growth, lower housing
wealth, and tight credit,” it said. “Business spending on equipment and
software is rising, though less rapidly than earlier in the year, while
investment in nonresidential structures continues to be weak.”
“Employers remain reluctant to add to payrolls,” the statement
continued. “The housing sector continues to be depressed.”
“Longer-term inflation expectations have remained stable, but
measures of underlying inflation have continued to trend downward,” it
added.
“Consistent with its statutory mandate, the Committee seeks to
foster maximum employment and price stability,” the FOMC announcement
went on to say. “Currently, the unemployment rate is elevated, and
measures of underlying inflation are somewhat low, relative to levels
that the Committee judges to be consistent, over the longer run, with
its dual mandate.”
“Although the Committee anticipates a gradual return to higher
levels of resource utilization in a context of price stability, progress
toward its objectives has been disappointingly slow,” the FOMC
reiterated.
The FOMC declared it will continue to buy Treasuries at the
previously announced amount “to promote a stronger pace of economic
recovery and to help ensure that inflation, over time, is at levels
consistent with its mandate.”
It pledged to “regularly review the pace of its securities
purchases and the overall size of the asset-purchase program in light of
incoming information and will adjust the program as needed to best
foster maximum employment and price stability.”
Once again, the FOMC said it “will maintain the target range for
the federal funds rate at 0 to 1/4 percent and continues to anticipate
that economic conditions, including low rates of resource utilization,
subdued inflation trends, and stable inflation expectations, are likely
to warrant exceptionally low levels for the federal funds rate for an
extended period.”
“The Committee will continue to monitor the economic outlook and
financial developments and will employ its policy tools as necessary to
support the economic recovery and to help ensure that inflation, over
time, is at levels consistent with its mandate,” the FOMC added.
As he has all year, Kansas City Federal Reserve Bank President
Thomas Hoenig dissented. The only thing that differed was the
explanation for his dissent: “In light of the improving economy, Mr.
Hoenig was concerned that a continued high level of monetary
accommodation would increase the risks of future economic and financial
imbalances and, over time, would cause an increase in long-term
inflation expectations that could destabilize the economy.”
** Market News International Washington Bureau: 202-371-2121 **
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