Tuesday, September 21, 2010

Federal Reserve: Pace of Economic Recovery Likely to be Modest in Near Term (Review)

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Federal Reserve Board Building in Washington, D.C.


Federal Reserve: Pace of Economic Recovery Likely to be Modest in Near Term

Overall USA Economy The Federal Open Market Committee issued a statement on Tuesday, September 21, after a one day meeting on monetary policy (at the bottom of this page). Overall the FOMC stated, "the pace of recovery in output and employment has slowed in recent months" and "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 modest in the near term."

"Modest" The Federal Reserve continues with the wording and theme of "modest" and "moderate" regarding economic activity, recovery, and growth. As always, the FOMC statement is carefully worded.

Zero Interest Rate Environment The FOMC continues to "maintain the target range for the federal funds rate at 0 to 1/4 percent" and expects "exceptionally low levels of the federal funds rate for an extended period."

Quantitative Easing There is some question as to if, and when, the Federal Reserve might intervene again with outright quantitative easing, or QE2. The Federal Reserve had previously utilized quantitative easing during the depths of the Great Recession - and those amounts are still on the Fed balance sheet. The FOMC stated, "The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate." Previously the FOMC statement from the August 10 meeting was, "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." The September 21 statement is viewed as stronger for quantitative easing by the end of 2010 than the August 10 statement.

Indirect Quantitative Easing In the previous  August 10 statement, the FOMC began an indirect form of quantitative easing by, "reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature." This was quantitative easing without increasing the Fed's balance sheet. The next step would be to an outright increase of the Fed's balance sheet by purchasing U.S. Treasury securities.


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FOMC Statement; September 21, 2010 FRB


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Federal Open Market Committee Statement


Federal Open Market Committee
Release Date: September 21, 2010
For immediate release

Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. 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. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. 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 modest in the near term.

Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.

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 for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.

The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.

Voting against the policy was Thomas M. Hoenig, who judged that the economy continues to recover at a moderate pace. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and will lead to future imbalances that undermine stable long-run growth. In addition, given economic and financial conditions, Mr. Hoenig did not believe that continuing to reinvest principal payments from its securities holdings was required to support the Committee’s policy objectives.


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