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Wednesday, June 23, 2010

FOMC: Economic Recovery Is Proceeding

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Federal Open Market Committee Meeting


Economic Recovery Is Proceeding and Labor Market Is Improving Gradually

Economic Conditions Another cautiously optimistic statement by the FOMC stating the "economic recovery is proceeding" and the "labor market is improving gradually". Housing starts "remain at depressed levels" and "bank lending has continued to contract in recent months". Some good news and some bad news but a net positive that there is an economic recovery occurring.

Moderate Recovery "Moderate" is still the theme for the Fed as the FOMC noted "the pace of economic recovery is likely to be moderate for a time". The Fed Beige Book on June 9 noted continued, modest improvement of economic activity and conditions in the last 8 weeks. Chairman Ben Bernanke, also on June 9, stated to the House Committee on the Budget "the recovery in economic activity that began in the second half of last year has continued at a moderate pace so far this year".

European Risk Europe was mentioned, "Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad". The previous April 28 statement said "financial market conditions remain supportive of economic growth" and did not mention "developements abroad". "Have beome less supportive" is not as positive as "remain supportive". 

Zero Interest Rate Environment Interest rates to remain 0.00%-0.25%, at "exceptionally low leve.s, for an "extended period". Sounds like for the remainder of 2010 at least.

Conclusion Bank lending continues to contract and housing starts remain at depressed levels, same as the April 28 statement. The labor market is "improving gradually" compared to "beginning to improve" noted on April 28. The European sovereign debt crisis and financial system crisis are the new negative variable in the FOMC June 23 statement, compared to  the April 28 statement. The European risk is "less supportive" of economic growth". The Committee expects the "economic recovery is likely to be moderate for a time", but continues to "anticipate a gradual return to higher levels of resource utilization", the same as the April 28 statement.

Below are the FOMC June 23 and April 28 statements.


FOMC Statement: June 23, 2010


Federal Open Market Committee
Release Date: June 23, 2010
For immediate release

Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.

Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee 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 of 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 promote economic recovery and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.


FOMC Statement: April 28, 2010


Release Date: April 28, 2010
For immediate release

Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee 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 of 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 promote economic recovery and price stability.

In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities; it closed on March 31 for loans backed by all other types of collateral.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.


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