Financial Controls: Federal Reserve: "Recovery Continuing at Moderate Pace, Though Somewhat More Slowly" (GDP Chart) *Labor market weaker*

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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 Wednesday, June 22, 2011 after a meeting on monetary policy (at the bottom of this page). Overall the FOMC revised their overall June statement to, "the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than expected". This is a more guarded and negative change regarding the USA economic recovery and USA labor market from the previous April statement: "the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are 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 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". Now in April and June, the FOMC is back to "moderate". As always, the FOMC statement is carefully worded.

Quantitative Easing aka Monetizing the Debt Ends June 30, 2011 The FOMC noted that, "The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month". 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 continued the uptrend. However, the 2011 Q2 GDP of +1.8% (second estimate) by the U.S. Bureau of Economic Analysis was disappointing. The Federal Reserve via the Federal Open Market Committee 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. QE2 ends June 30, 2011 and indirect quantitative easing, reinvesting the principal payments, will continue indefinitely. The chart covers the last 25 quarters of the USA GDP as reported by U.S. Bureau of Economic Analysis from 2005 Q1 through 2011 Q1.

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Federal Open Market Committee Statement

Federal Open Market Committee

Release Date: June 22, 2011

Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. 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. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate 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 for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The Committee will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability.

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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