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Marriner S. Eccles Federal Reserve Board Building in Washington, D.C.
Federal Reserve: Pace of USA economic recovery continues to be slow
USA Economy The Federal Open Market Committee issued a statement on Wednesday, November 3, after a two day meeting on monetary policy (at the bottom of this page). Overall the FOMC stated, "the pace of recovery in output and employment continues to be slow" and "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."
From "Modest" to "Slow" The Federal Reserve previously, for months, utilized the wording and theme of "modest" and "moderate" regarding economic activity, recovery, and growth. The current statement has changed to "slow": slow pace of recovery in output, slow pace of recovery in employment, disappointingly slow progress in FOMC objectives. As always, the FOMC statement is carefully worded.
Zero Interest Rate Environment for an Extended Period 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 aka Monetizing the Debt This was the big news in the current FOMC statement; "To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities." Further, the FOMC stated, "the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month." Quantitative easing, or QE2, has officially arrived. 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 Fed balance sheet will now be expand its balance sheet further.
Indirect Quantitative Easing In the August 10, 2010 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 FOMC reiterated this policy in the current November 3 statement, "The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings."
Here's the Fed's Problem - Inadequate USA GDP Growth
USA GDP by Quarter (Chart) The chart below is the annualized percentage change of the GDP from the preceding quarter, the most common GDP measure. As can be seen, there was a negative dip into the Great Recession beginning 2008 Q1, a rebound peaking with the 2009 Q4, a downward trend in 2010 Q1 and Q2. The USA economy appeared to be at a crossroads in Q2: a continuing downwards trend towards zero growth or a bounce upwards from there? The Q3 +2.0% is a small bounce upwards. A +3.0% annualized GDP growth rate is generally accepted as the minimum necessary to generate jobs growth. Therefore, the USA is growing at approximately 2/3 of the rate necessary to bring down the unemployment rate and the Fed as resorted to QE2, a second round of quantitative easing, in an attempt to boost the economy, increase the GDP, and bring down the unemployment rate. The chart covers the last 23 quarters (5+ years) of USA GDP as reported by BEA from 2005 Q1 through 2010 Q3.
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Federal Open Market Committee Statement
Federal Open Market Committee
Release Date: November 3, 2010
For immediate release
Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. 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 continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. 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.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will 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.
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 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.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.
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