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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."
"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 Tuesday, August 9, 2011 after a meeting on monetary policy (at the bottom of this page). The FOMC revised their August statement to, "economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.". This is a more negative tone regarding the USA economic recovery and USA labor market from the previous June statement: "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".
GDP Revisions The Bureau of Economic Analysis, on July 29, 2011, significantly revised the USA GDP from Q3 2008 through Q1 2011. This revised data revealed a deeper Great Recession and slower recovery. This also undoubtedly caused the FOMC to downshift their wording regarding the recovery. See charts below.
GDP Revisions The Bureau of Economic Analysis, on July 29, 2011, significantly revised the USA GDP from Q3 2008 through Q1 2011. This revised data revealed a deeper Great Recession and slower recovery. This also undoubtedly caused the FOMC to downshift their wording regarding the recovery. See charts below.
Economic Recovery Now "Considerably Slower" Now the FOMC is saying the recovery is "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.
No Additional or Supplemental Quantitative Easing Announced The FOMC did not announce any additional (QE3) or supplemental (QE2.1) quantitative easing. Some analysts had expected the Federal Reserve to announce monetization of additional USA debt because of the current precarious economic, financial, and market conditions. QE2, the second round of monetizing the debt, ceased as of June 30, 2011. 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.
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 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 for an Extended Period 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". This is the first definitive time frame provided by the FOMC in a long time. Previously, for months and months, the FOMC had said 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 1/2 years ago.
Here's the Federal Reserve's Problem - Inadequate USA GDP Growth
Here's the Federal Reserve's Problem - Inadequate USA GDP Growth
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: August 9, 2011
Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, 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, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier 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 now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. 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 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 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 also 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 discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.
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Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, 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, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier 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 now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. 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 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 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 also 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 discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.
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