Wednesday, April 27, 2011

Federal Reserve: "USA Economic Recovery Proceeding at a Moderate Pace" (GDP Chart) "Labor market improving gradually"

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Marriner S. Eccles Federal Reserve Board Building in Washington, D.C.




USA Economy The Federal Open Market Committee issued a statement on Wednesday, April 27, 2011 after a meeting on monetary policy (at the bottom of this page). Overall the FOMC revised their overall April statement to, "the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually". This appears to be a more guarded and conservative change regarding the recovery but slightly more positive for the labor market, from the previous March statement: "the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually". The current FOMC statement is more positive than the January statement: "the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions".

From "Modest" to "Slow" to "Insufficient" to "Firmer Footing" to "Moderate" The Federal Reserve previously, for months, utilized the wording and theme of "modest" and "moderate" regarding economic activity, recovery, and growth. In November, this was changed to "slow": slow pace of recovery in output, slow pace of recovery in employment, disappointingly slow progress in FOMC objectives. In December and January, economic activity, recovery, and growth was "insufficient". In March the FOMC was saying the economic recovery was on "firmer footing". Now in April, the FOMC is back to "moderate". As always, the FOMC statement is carefully worded.

Quantitative Easing aka Monetizing the Debt The FOMC reiterated from November, "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 continue expanding its holdings of securities as announced in November." That is, "the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter." Quantitative easing, or QE2, the second round of monetizing the debt, will continue as planned through June 2011. The Federal Reserve had previously utilized quantitative easing during the depths of the Great Recession, or QE1, - and those amounts are still on the Fed balance sheet. The total of QE1 was near $1.4 trillion in longer-term securities. The Federal Reserve will continue to expand its balance sheet through June 2011. 

Indirect Quantitative Easing In the August 10, 2010 statement, the FOMC began an indirect form of quantitative easing, separate from QE1 or QE2, 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 is quantitative easing without increasing the Fed's balance sheet. The FOMC has affirmed this policy at each subsequent meeting, "the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings."

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." The Federal Reserve cut the federal funds rate to near 0% in December 2008, over 2 years ago.


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 (seasonally adjusted at annual rate) from the preceding quarter (QoQ), a common GDP measure. As can be seen, there was a negative dip into the Great Recession beginning 2008 Q2, a rebound peaking in 2009 Q4, a downward trend in 2010 Q1 and Q2. The USA economy appeared to be at a crossroads at 2010 Q2: a continuing downwards trend towards zero growth or a bounce upwards from there? The 2010 Q3 +2.6% was a bounce upwards and the 2010 Q4 +3.1% marginally continues the uptrend. The Federal Reserve via the Federal Open Market Committee has resorted to QE2, a second round of quantitative easing, plus indirect quantitative easing in an attempt to boost the economy, increase the GDP, and bring down the unemployment rate. The chart covers the last 24 quarters of the USA GDP as reported by U.S. Bureau of Economic Analysis from 2005 Q1 through 2010 Q4.



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Federal Open Market Committee Statement

Federal Open Market Committee
Release Date: April 27, 2011
For immediate release

Information received since the Federal Open Market Committee met in March indicates that the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March. Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.

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 continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter. The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings 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; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

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