Marriner S. Eccles Federal Reserve Board Building in Washington, D.C.
Federal Reserve: USA Economic Recovery Is Continuing
USA Economy The Federal Open Market Committee issued a statement on Wednesday, January 26, after a two day meeting on monetary policy (at the bottom of this page). Overall the FOMC slightly revised their overall statement to, "the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions". This is a slight change from the December statement: "economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment". The FOMC repeated the November 3 and December 14 statement, "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" to "Insufficient" 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 is "insufficient". 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." Further, the FOMC repeated from November, "the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011." Quantitative easing, or QE2, the second round of monetizing the debt, will continue. 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 continue to 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 affirmed this policy in the November 3 and December 14 statements, "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."
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), the most 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% (third estimate) was a bounce upwards and the 2010 Q4 +3.2% 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 BEA from 2005 Q1 through 2010 Q4 (advance estimate).
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Federal Open Market Committee Statement
Federal Open Market Committee
Release Date: January 26, 2011
Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, while investment in nonresidential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.
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 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 intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. 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; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
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