Federal Reserve officials agreed with their leader Ben Bernanke’s view that the economy will pick up later this year and allow the central bank to taper its asset purchase plan before the end of the year, according to minutes released today (Aug. 21). But they shied away from signaling when a move might come.
MarketWatch reported that the central bankers did not signal as to whether such a taper of the $85 billion-per-month bond purchase plan would come in September, October or December, the three remaining meeting dates for 2013.
There were few signs that a majority was poised to pull the trigger at the September meeting but also there were no strong arguments against a quick move.
There were conflicting views expressed, with neither in the majority.
While a “few” argued that “it might soon be time to slow somewhat” the pace of asset purchases, another “few” counseled patience. It is often hard from the minutes to judge whether a view is in the ascendancy.
Financial markets generally expect the central bank to pull back at its September meeting by about $20 billion, according to Michael Hanson, chief U.S. economist at Bank of America Merrill Lynch.
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Federal Reserve Bank of New York President William C. Dudley said the central bank may prolong its asset-purchase program if the economy’s performance fails to meet the Fed’s forecasts, according to Bloomberg report.
“If labor market conditions and the economy’s growth momentum were to be less favorable than in the FOMC’s outlook — and this is what has happened in recent years — I would expect that the asset purchases would continue at a higher pace for longer,” Dudley said in remarks prepared for delivery today (June 27) in New York. He serves as vice chairman of the Federal Open Market Committee (FOMC) and has never dissented from a monetary policy decision.
Dudley also said any decision to reduce the pace of asset purchases wouldn’t represent a withdrawal of stimulus, and that an increase in the Fed’s benchmark interest rate is “very likely to be a long way off.” The economy may also diverge from the Fed’s forecasts, he said.
Concerns the Fed may curtail accommodation helped push the yield on the 10-year Treasury note to as high as 2.61% this week from as low as 1.63% in May. Dudley joined other Fed policy makers this week in seeking to damp expectations that an increase in the benchmark interest rate will come sooner than previously forecast.
“Let me emphasize that such an expectation would be quite out of sync with both FOMC statements and the expectations of most FOMC participants,” said Dudley, 60, a former chief U.S. economist for Goldman Sachs Group Inc.
The Federal Reserve agreed Wednesday to keep its “easy money” policies going full tilt for now, hoping to calm markets that have gyrated recently over speculation of a possible early scaling back of the Fed’s massive stimulus.
In a statement after a two-day meeting, the Fed said it will continue to buy $85 billion a month in Treasury bonds and mortgage-backed securities until the labor market improves substantially, according to a report by USA Today. The purchases. launched last year, are intended to hold down long-term interest rates and have fueled the recent housing rebound and a blazing stock market rally.
The Fed, however, now expects a faster decline in the 7.6% unemployment rate — to 7.2% to 7.3% by year-end and to 6.5% to 6.8% by the end of 2014. In March, the Fed expected the jobless rate to be 6.7% to 7% by the end of 2014 and not to reach 6% to 6.5% before 2015.
The Fed’s view that the unemployment rate will fall faster than prior projections theoretically could lead to an earlier increase in the Fed’s benchmark short-term interest, now near zero. Fed policymakers have said they would not increase that rate — known as the fed funds rate — at least until the jobless rate falls to 6.5%, as long as the inflation outlook remains below 2.5%.
The first rate hike thus could happen as soon as 2014, rather than 2015 as previously expected. However, 14 of 19 Fed policymakers still don’t expect the first rate increase until 2015. The Fed has emphasized that a short-term rate increase would depend on other labor market data as well. For example, if the unemployment rate is falling because fewer Americans are working or looking for work, it could keep its short-term rate lower longer, especially if inflation is low.
Fed policymakers do expect lower inflation. They now project inflation of 1.2% to 1.3% this year, down from their March forecast of 1.5% to 1.6%. That could give the Fed more leeway to keep its easy-money policies going longer.
Federal Reserve officials Wednesday (March 20) acknowledged the recent pick-up in economic growth, noting in particular “labor market conditions have shown signs of improvement,” but the central bank made no change in its ongoing aggressive stimulus programs.
The Los Angeles Times reported that Fed policymakers, after their two-day meeting, voted 11 to 1 to keep buying $85 billion of Treasury and mortgage securities every month.
And as expected, they left the short-term interest rate at near zero, where it has been since late 2008. Fed policymakers repeated they would keep the interest rate at that level as long as the jobless rate is above 6.5% and the inflation outlook remains close to its target rate of 2%.
Most Fed officials don’t see the unemployment rate, currently 7.7%, reaching 6.5% until 2015.
Despite the recent improvement in the economy, the Fed’s updated economic outlook actually forecast growth this year to come in slightly less than the central bank’s previous projections in December.
That is presumably because of the federal spending cuts that kicked in March 1 under sequestration, something the Fed pointed to in its statement Wednesday, saying “fiscal policy has become somewhat more restrictive.”
The Fed reduced its forecast for economic growth this year, saying the economy would expand at no greater than 2.8%, down from a projected maximum of 3% made in December.
At the same time, the Fed lowered its projection for the unemployment rate, saying it would range from 7.3% to 7.5% by the fourth quarter. The forecast in December was 7.4% to 7.7%.
The latest statement from the Fed, coming after a two-day policy meeting, has been eagerly anticipated as the economic recovery has accelerated in recent weeks.
Job growth in February exceeded analyst expectations. The economy added 236,000 net new jobs that month and the unemployment rate fell to 7.7%, the lowest level since the end of 2008.
Since 2008, the Fed has been engaged in unprecedented attempts to stimulate the economy by keeping short-term interest rates near zero and dramatically expanding its balance sheet.
The central bank’s latest, and most ambitious, effort began in the fall as the Fed began purchasing $85 billion in bonds a month to hold down long-term interest rates in hopes of increasing spending by businesses.
The Federal Reserve said today that the U.S. economy was expanding “modestly” last month, supported by improvements in housing and auto sales, even as the labor market showed little change.
“Consumer spending was generally reported to be flat to up slightly since the last report,” the Fed said in its Beige Book business survey, which is based on accounts from the 12 district Fed banks. Conditions in manufacturing were “somewhat improved,” according to the report, which provides anecdotal evidence on the health of the economy two weeks before the Federal Open Market Committee meets in Washington on Oct. 23-24.
Bloomberg reported that the Beige Book provides support for Fed Chairman Ben S. Bernanke’s view that economic growth isn’t strong enough to bring about a quick healing of the labor market. A Labor Department report last week showed that while the unemployment rate unexpectedly declined in September, payroll growth slowed.
The Fed on Sept. 13 announced a third round of quantitative easing, with purchases of $40 billion a month of mortgage debt, and said its benchmark interest rate was likely to stay low through the middle of 2015.
The report’s description of the economy is not as positive as Beige Books earlier in the year, which used the word “moderate” to describe the pace of expansion, said Dana Saporta, U.S. economist at Credit Suisse Group AG in New York. “In Fed parlance, modest is a step down from moderate,” she said.
Federal Reserve Chairman Ben Bernanke offered a robust defense of the effectiveness of the central bank’s easy-money policies in his speech Friday at the Fed conference here, and left little doubt that he is looking toward doing more to give the economy a lift at the Fed’s next policy meeting in September.
As reported by the Wall Street Journal, Bernanke also flagged deep worries about the pace of the economic recovery, calling it “far from satisfactory” and cited concerns about the jobs market’s weak growth in his speech at the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole, Wyo.
Some market participants have been wondering if a run of moderately better economic data of late has changed the Fed’s thinking about the economy. Bernanke left little doubt that he is still deeply dissatisfied with the outlook
He dwelled on stagnation in the labor market, describing high unemployment as a “grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for years.” Moreover, he said, “it is important to achieve further progress, particularly in the labor market.”
Importantly, the Fed chairman also said the job market’s weakness, to date at least, is the result of cyclical problems in the economy—that is, a lack of demand—and not structural ones, such as a mismatch between the skills people have and the skills employers are looking for.
The Fed feels it can help on cyclical problems, but not structural ones. In other words, this is a situation where the Fed feels it can do something. Bernanke also included his “no panacea” caveat: He would love fiscal policy makers to take actions to support the economy and address long-run deficits. But he doesn’t seem to see that as justification for inaction on his front.
The focus on labor-market stagnation is critical. The Fed has a dual mandate imposed by Congress to achieve price stability and maximum sustainable employment. Bernanke played down inflation risks, saying inflation has remained near 2%, “despite repeated warnings that excessive policy accommodation would ignite inflation.” With inflation stable and unemployment unsatisfactorily high, Bernanke in effect laid out his legal argument for pressing harder on the monetary gas pedal.
The Federal Reserve is likely to deliver another round of monetary stimulus “fairly soon” unless the economy improves considerably, minutes from the central bank’s August meeting show.
Reuters reported that while the meeting was held before a recent improvement in the economic data, including a stronger-than-expected July reading for U.S. employment, policymakers were pretty categorical about their dissatisfaction with the current outlook.
“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” the Fed said in minutes to its July 31-Aug. 1 meeting.
Fed officials saw significant risks to an already weak U.S. economy, which grew at a sluggish 1.5% annual rate in the second quarter. The risks include a worsening of Europe’s financial strains and the looming U.S. budget cuts and tax hikes, which have become commonly known as a fiscal cliff.
Many Fed officials supported extending the central bank’s guidance for the likely timing of an eventual interest rate hike, currently set at late 2014, further into the future. But they decided to defer the decision to the Fed’s September 12-13 meeting, when the central bank will release a new round of economic forecasts.
The Federal Reserve said Wednesday (Jan. 25) that it would leave rates unchanged and does not plan any changes until late 2014.
According to a USA Today report, when the Fed’s policymaking meeting ended Wednesday, the Fed released a statement, which says that “the economy has been expanding moderately.” But it also pointed out that “the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed.”
The new forecasts on rate directions are part of a Fed drive to make its policy more transparent and its communications with the public more clear and open. The more immediate goal is to assure consumers and investors that they’ll be able to borrow cheaply well into the future.
The Fed’s post-meet announcement Wednesday, as expected, did not include any further Fed action to try to lift the economy. Most analysts think Fed members want to put off any new steps, such as more long-term bond purchases, to see whether the economy can extend the gains it has made in recent months without any help from the Fed.
Fewer banks eased standards on loans to businesses in the third quarter, and lenders tightened standards on credit to European banks and their affiliates, according to a Federal Reserve survey.
Bloomberg reported that banks were slightly more likely to ease than tighten their standards on credit, “in contrast to more widespread reports of such easing in previous quarters,” the central bank said today in its quarterly survey of senior loan officers. Banks that raised their standards “cited a less favorable or more uncertain economic outlook as a reason for the tightening.”
Fed Chairman Ben S. Bernanke and his colleagues on the Federal Open Market Committee are struggling to boost an economy so weak that unemployment has been near 9 percent or higher for 31 consecutive months. In a press conference last week, Bernanke said the expansion is hampered by “still-tight credit conditions” for many households and small businesses and that “monetary policy has been blunted” by the dysfunctional mortgage market.
In a special set of questions on lending to firms with European exposure, about half of U.S. banks said they made loans or extended credit lines to European counterparts. About two- thirds of all banks that made loans to European banks tightened their standards, and many “indicated that the tightening was considerable.”
U.S. economic growth quickened in the third quarter to a 2.5 percent annual rate after a 0.4 percent pace in the first quarter and 1.3 percent in the second. Employers added 80,000 employees to their payrolls in October, and the unemployment rate dipped to 9 percent.
The Federal Reserve is holding off on any new actions to help the economy because stronger growth is giving it time to gauge the impact of steps it’s already taken. The Associated Press reported that Fed policymakers made the announcement after a two-day meeting.
In a statement released Wednesday, the officials said the economy has strengthened and consumers have stepped up spending. But they said the economy continues to face significant downside risks, including strain in global financial markets — a reference to the crisis in Europe.
The Fed left open the possibility of taking further steps later to try to boost the sluggish economy. But it gave no hint as to what those moves might be.
The vote was 9-1. Charles Evans, the president of the Chicago Federal Reserve Bank, dissented. The statement said he wanted to take stronger action.
After their September meeting, the policymakers said they would shuffle the Fed’s investment portfolio to try to further reduce long-term interest rates. And in their previous meeting in August, they had said they plan to keep short-term rates near zero until at least mid-2013, unless the economy improved.
The Fed repeated the mid-2013 target in its statement Wednesday, and also said it was continuing its program to rebalance its portfolio to try to lower long-term rates.
The Fed has kept its key short-term interest rate at a record low since December 2008. This is the rate that banks charge on overnight loans. It serves as the benchmark for millions of business and consumer loans.
Later today, the Fed will also release its economic forecasts and Chairman Ben Bernanke will hold a news conference.
The debt crisis in Europe could force the Fed to lower its economic projections. The Greek prime minister’s surprise move to call a referendum on the country’s latest rescue plan sparked fears that the debt deal could unravel, that Greece could default on its debt and that the crisis could infect the global financial system.
Even if Europe dodges a financial catastrophe, many economists think it’s headed for a recession that would affect the U.S. and global economies. The Fed expressed such concerns after its August meeting.
Still, the Fed remains deeply divided over what, if any, action to take next. The actions taken in August and September were adopted on 7-3 votes, the most dissents in nearly 20 years.