Thursday, November 3, 2011

Federal Reserve: "Economic growth strengthened somewhat" (GDP Charts) "Continuing weakness in labor market"

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Marriner S. Eccles Federal Reserve Board Building in Washington, D.C.
"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability."


USA Economy
The Federal Open Market Committee issued a statement on November 2, 2011 after a meeting on monetary policy (at the bottom of this page). The FOMC revised their November statement to, "Economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated.""

This is more positive than the prior statement in September regarding the USA economy and labor market. "economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated."

Other key points were:
Unemployment rate remains elevated
Household spending has increased at a somewhat faster pace in recent months.
Business investment in equipment and software has continued to expand
● Investment in nonresidential structures is still weak
Housing sector remains depressed
Inflation appears to have moderated

The FOMC also continued to note, "there are significant downside risks to the economic outlook, including strains in global financial markets".

Economic Growth Now "Strengthened Somewhat" Now the FOMC is saying economic growth "strengthened somewhat' after stating in September that economic growth "remains slow" and in August that economic growth was "considerably slower". The Federal Reserve previously, for months, utilized the wording and theme of "modest" and "moderate" regarding economic activity, recovery, and growth. In November 2010, 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 2010 and January 2011, economic activity, recovery, and growth was "insufficient". In March 2011 the FOMC was saying the economic recovery was on "firmer footing". Then in April and June, the FOMC was back to "moderate". The FOMC statement is carefully worded.

Operation Twist: Maturity Extension Program and Reinvestment Policy The FOMC announced Operation Twist in September: "Under the maturity extension program, the Federal Reserve intends to sell $400 billion of shorter-term Treasury securities by the end of June 2012 and use the proceeds to buy longer-term Treasury securities. This will extend the average maturity of the securities in the Federal Reserve’s portfolio. By reducing the supply of longer-term Treasury securities in the market, this action should put downward pressure on longer-term interest rates, including rates on financial assets that investors consider to be close substitutes for longer-term Treasury securities. The reduction in longer-term interest rates, in turn, will contribute to a broad easing in financial market conditions that will provide additional stimulus to support the economic recovery." This does not monetize additional USA debt but reallocates the existing U.S. Treasury debt owned by the Federal Reserve.

Quantitative Easing The Federal Reserve had previously utilized quantitative easing, or QE1, during the depths of the Great Recession - and those amounts are still on the Fed balance sheet. A second round of quantitative easing, or QE2, was then implemented - and those amounts are also still on the Fed balance sheet. The total of QE1 was near $1.4 trillion in longer-term U.S. Treasury securities. The total of QE2 was $600 billion in longer-term U.S. Treasury securities. Now $400 billion of those existing holdings will be shifted from shorter-term to longer-term via Operation Twist.

Indirect Quantitative Easing In the August 2010 statement, the FOMC began an indirect form of quantitative easing, separate from QE1, QE2, or Operating Twist 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 continues to affirm this policy at each subsequent meeting, "The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings and is prepared to adjust those holding as appropriate."

Zero Interest Rate Environment Until Mid-2013 The FOMC continues to "maintain the target range for the federal funds rate at 0 to 1/4 percent" but added in August 2011, "The Committee currently anticipates that economic conditions - including low rates of resource utilization and a subdued outlook for inflation over the medium run - are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013". The Federal Reserve cut the federal funds rate to near 0% in December 2008, nearly 3 years ago.

Here's the Federal Reserve's Problem - Inadequate USA GDP Growth

GDP Revisions On July 29, 2011, the BEA announced revisions of the USA quarterly and annual GDPs from Q1 2007 through Q1 2011. The original, final data and the revised data are shown on the chart below. The BEA provides an original 3 estimates (advance, second, third) and periodically revises the third, final estimate. These data and the revisions are the American economic story, subject to change.

USA Real GDP % by Quarter (Chart)  The chart below is the annualized percentage change of the Real GDP (seasonally adjusted at annual rate) from the preceding quarter (QoQ), from Q1 2008 through Q2 2011. The original Bureau of Economic Analysis GDP data is in blue. The revised Bureau of Economic Analysis GDP data is in red. An initial negative drop occurred in Q1 2008, but was followed by a positive bounce in Q2 2008. A negative drop into the Great Recession began Q3 2008 at the time of the USA Financial Crisis, followed by a steep decline, and bottom, in Q4 2008. The deepness of the Great Recession continued in Q1 2009. The Great Recession continued for 4 quarters until Q2 2009. Positive GDP growth resumed in Q3 2009, the rebound peaking in late 2009 and early 2010. The Q1 2010 GDP of +3.9% is now the recent recovery peak.


USA Real GDP % by Year (Chart) The chart below is the annual percentage change of the Real GDP (seasonally adjusted at annual rate) from the preceding year (YoY), from 2004 through 2010. The original Bureau of Economic Analysis GDP data is in blue. The revised Bureau of Economic Analysis GDP data is in red. USA GDP peaked in 2004 at +3.5%, the highest since 2000 (+4.1%). GDP decreased 5 consecutive years. The Great Recession is evident beginning in 2008 at -0.3% and 2009 at -3.5%. 2010 GDP recovered to +3.0%, a 5-year high (2005 = +3.1%).


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Federal Open Market Committee Statement

Federal Open Market Committee
Release Date: November 2, 2011

Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent months. Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.

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