Federal Reserve Monetary Policy

"Information received since the Federal Open Market Committee met in March suggests that the economy has been expanding moderately. Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated. Household spending and business fixed investment have continued to advance. Despite some signs of improvement, the housing sector remains depressed. Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However, longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The increase in oil and gasoline prices earlier this year is expected to affect inflation only temporarily, and the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0% to 0.25% 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 late 2014.

The Committee also decided 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 to promote a stronger economic recovery in a context of price stability."

Source: The Federal Reserve

Contacts in all 12 Federal Reserve Districts reported that the last six-week tracking period of the Beige Book economic roundup has brought continued growth with, stop us if you’ve heard this many times before, manufacturing leading the charge.

Manufacturing’s mid-winter increase was characterized as “steady” through the nation, with new orders, shipments and production up in most of the districts. Auto-related industries and those tied to capital spending, as previously noted in Business Credit and NACM eNews, continued to thrive.

Agriculture and real estate were more mixed bags, pending on the location – but, for the latter, anything above across-the-board stagnation for the reeling construction industry reads like a win.
Business credit quality and demand were stable or showed a slight uptick in districts including Cleveland, Richmond, San Francisco in Atlanta. There was particular middle-market strength in Dallas in that regard, and there was also a bump in large corporate lending in Chicago.

For overall growth, across all sectors, Philadelphia and Atlanta demonstrated the best six-week showing, according to Beige Book. The east-coast duo was followed by auto-friendly districts of Cleveland and Chicago as well as Kansas City, Dallas, and San Francisco.

The good news was well-timed for a long-battered Fed Chairman Ben Bernanke. The chairman was due on Capitol Hill Thursday to present the Semi-annual Monetary Policy report to the House Financial Services Committee, where he has faced sharp criticism before election-mode lawmakers in recent months.

Brian Shappell, NACM staff writer
 

While testifying before the U.S. Senate in recent days, a Federal Reserve official defended the decision for the Fed and central banks from two other continents to try to help the European Union amid a debt crisis that threatens to hurt the economic rebounds of itself and trading partners alike.

Steven B. Kamin, director of the Fed’s Division of International Finance said in prepared testimony that measures taken in November, including the expansion of swap lines for European banking institutions, were a help not only to those receiving the aid, but business in nations backing the assistance. These include the United States, Japan, Switzerland, the United Kingdom as well as the European Central Bank. Kamin said the spillover from problems with the high-debt nations, most the “PIIGS nations” (Portugal, Ireland, Italy, Greece, Spain) would have caused greater problems, including tougher credit conditions, in the United States and Japan without the aid in the form of monetary policy.

However, it’s worth noting, Kamin’s speech wasn’t a virtual pep rally to decree that all crises had been averted:

“Many financial institutions, especially those from Europe, continue to find it difficult and costly to acquire dollar funding, in large part because investors remain uncertain about Europe's economic and financial prospects. Ultimately, the easing of strains in U.S. and global financial markets will require concerted action on the part of European authorities as they follow through on their announced plans to address their fiscal and financial difficulties. The situation in Europe is continuously evolving. Thus, we are closely monitoring events in the region and their spillovers.”

Brian Shappell, NACM staff writer

The Federal Reserve’s Federal Open Market Committee (FOMC) announced today that it would take new steps to stimulate America’s lagging economy. In addition to maintaining the target range for the federal funds rate at 0 to 0.25%, the FOMC also will also extend the average maturity of its securities holdings, with the goal of keeping long-term interest rates low.

“The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of six years to 30 years and to sell an equal amount of treasury securities with remaining maturities of three years or less,” said the FOMC in a statement.  “This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.”

The FOMC also reiterated the federal funds rate is likely to remain in the 0-0.25% range at least through the middle of 2013, citing low resource utilization along with a subdued outlook for inflation over the medium-term.

Safe in the knowledge that rates will remain low, and that long-term interest rates will hopefully be lower, banks and other lenders will ideally be moved by the Fed’s most recent actions to loosen up credit, generating an overall increase in business and especially consumer spending. Although, in its statement, fears of inflation are modest at best, some analysts believe the shift in the Fed’s portfolio from shorter-term, to longer-term holdings could create a spike in inflation. 

Three members of the FOMC voted against the decision.

The Fed's actions came following this morning’s news that Congressional Republicans sent a letter to the Federal Reserve urging Chairman Ben Bernanke not to take any further actions that could be described as “monetary stimulus.” “Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people,” said the letter, signed by Senate Minority Leader Mitch McConnell (R-KY), Senate Minority Whip Jon Kyl (R-TX), Speaker of the House John Boehner (R-OH), and House Majority Leader Eric Cantor (R-VA).

Although it turned out to be largely ignored by the FOMC, as many expected it to be, the letter ruffled feathers as a rare attempt to influence the behavior of the Fed, which is considered an independent agency designed to operate beyond the bounds of political influence.

Stay tuned to NACM’s blog and eNews for further updates and analysis.

Jacob Barron, CICP, NACM staff writer

Be sure to check NACM's various social media platforms tomorrow for breaking updates on the FCIB New York International Roundtable and the Federal Reserve's two-day monetary policy meeting.

Wednesday's FCIB Roundtable, being held at Manhattan's famous Princeton Club, will be headlined by a rare appearance from keynote speaker Matthew Higgins, vice president of the Federal Reserve Bank of New York. NACM will be tweeting throughout the afternoon from the event, and coverage will be available on the blog and in eNews on Thursday.

For more infomration on the Roundtable or to register, visit www.fcibglobal.com and check out the events page, which is easily accessible from the website's home page.

In addition, NACM's blog will feature breaking coverage of the Fed announcement at http://blog.nacm.org. 

The highly anticipated speech by Federal Reserve Chairman Ben Bernanke at an annual symposium held in Jackson Hole, WY, yielded little in the way of new information. Instead, the chairman avoided the issue of another anticipated stimulus program (quantitative easing/QE III), played the part of cheerleader for long-term growth prospects and even needled a Congress, one that has been so critical of the Fed, over its woeful handling of the debt ceiling/budget debate.

Bernanke reiterated to the annual meeting about Federal Reserve montary policy held by Fed Bank of Kansas City the message the Fed has only recently started admitting: that the recession was much deeper than originally thought and the recovery was going to continue to be slower than anticipated and hoped. Much of this can be tied to the ongoing housing market woes and their impact on household wealth as well as employment levels. Still, Bernanke spent much of his speech wearing proverbial rose-colored glasses:

“Notwithstanding the severe difficulties we currently face, I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if--and I stress if--our country takes the necessary steps [such as more proactive housing and monetary policies] to secure that outcome. Economic healing will take a while, and there may be setbacks along the way. However, the healing process should not leave major scars.” Bernanke boasted of the U.S. economy’s diversity, traditional strong market advantages, entrepreneurial culture and technological leadership, as well. However, the Fed chairman did touch on worries for the not-so-distant future: health care costs, entitlements of an aging population and a K-12 school system that “poorly serves a substantial portion of our population.”

In what appeared a thinly veiled shot at Congressional lawmakers, Bernanke noted U.S. businesses and consumers “would be well served by a better process for making fiscal decisions:”

“The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses…fiscal policymakers could consider developing a more effective process.”

Brian Shappell, NACM staff writer

Under the intense scrutiny of world markets days after the United States’ embarrassing credit downgrade, officials emerged from the latest Federal Reserve monetary policy meeting pledging to keep interest rates low and stay the course on its Treasury securities. However, Chairman Ben Bernanke and company failed to unveil any new programs to help out the stalled economy, which the Fed finally admitted has been significantly slower in rebounding than predicted even as recently as six weeks ago.

The Fed’s Federal Open Market Committee held interest rates at a range between 0% and 0.25%. Additionally, the FOMC uncharacteristically gave a time range for keeping rates low of through mid-2013, hoping to ease concerns of the business sector. Previously, the FOMC fell back on statements of keeping rates low “for an extended period.” The FOMC opted to continue its “existing policy of reinvesting principal payments from its securities holdings.”

Without making mention of the Standard and Poor’s rating decrease, the FOMC noted economic growth was not likely to increase in rapid fashion anytime soon. It looked at long-term factors such as the unemployment rate and poor housing prices as well as more temporary problems such as supply-line disruptions tied to the Japanese earthquake/tsunami disaster as the main hurdles to a hot recovery period.

“The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting…Moreover, downside risks to the economic outlook have increased,” the Fed’s statement noted. “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.”

Brian Shappell, NACM staff writer

"Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be 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 the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, 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. The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. 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 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% 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."

Source: Federal Reserve