Federal Reserve Votes for Continuing Stimulus

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.

 

Fed Beige Book: U.S. Economy Grows Modestly

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.

Bernanke Signals Fed is Gearing up to Do More

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.

Report: Fed’s Poised For Next Stimulus Round

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.

 

Report: Fed Will Keep Rates Stable Until Late ’14

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.

Report: Fewer Banks Easing Lending Standards

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.

 

Federal Reserve Holds Off on Further Stimulus

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.

 

Federal Reserve Sees Growth in All 12 Regions

The U.S. economy expanded in January and early February in all parts of the country, but businesses reported they are under pressure to raise their prices, the Associated Press reported.

A Federal Reserve survey released Wednesday (March 2) showed that all 12 of the Fed’s regions reported growth at a “modest to moderate pace” and it pointed to a pickup in job creation in each.

Retail sales picked up in 10 of the 12 regions, while falling in the Richmond and Atlanta areas. Factory activity rose in all districts except St. Louis.

The survey hinted at some inflationary concerns. Costs are rising for manufacturers and retailers in most areas. Manufacturers in many districts said they are increasingly able to pass on those costs to customers. Retailers in some districts said they have or soon will raise prices.

“There are beginning to be some troubling signs on inflation,” said Steven Wood, chief economist at Insight Economics.

But other economists noted that the survey found little evidence that wages are increasing. Accelerating wages are “a necessary condition for a sustained, destabilizing high-inflation episode,” said Dana Saporta, an economist at Credit Suisse Securities.

Federal Reserve Chairman Ben Bernanke endured tough questioning from members of Congress on Tuesday and Wednesday about the threat of rising inflation. Lawmakers raised concerns that the Fed’s $600 billion bond-purchase program is laying the groundwork for higher prices.

Those concerns have been heightened by recent run-ups in the price of oil, corn, wheat and other commodities.

Bernanke told members of Congress that higher oil prices, which have risen due to turmoil in the Middle East, would likely cause only a temporary and mild increase in inflation.

The U.S. economy has been growing for 18 months. But that expansion hasn’t been enough to significantly lower the nation’s unemployment rate, which was 9% in January. The federal government will release the February jobs report on Friday.

The Fed survey did note that the job market is picking up in all districts. Many districts reported improved hiring in the manufacturing and health care industries.

Seven districts said that staffing agencies are more optimistic, with more employers converting temporary jobs to permanent status. Permanent hiring is also picking up, the agencies said.

The survey also noted that wages remain steady in five districts and are rising only modestly in several others. Sluggish wage growth should act to restrain future price increases.

Harsh snowstorms in many different parts of the country reduced store sales and factory activity. Bad weather disrupted manufacturing in the Cleveland, Atlanta and Minneapolis regions, and pushed down retail sales in six districts.

Housing remains the economy’s main weak spot, the report showed.

“Overall sales and construction remained at low levels across all districts,” the survey said. The St. Louis region said sales are still declining.

Bernanke: U.S. Economic Outlook ‘Uncertain’

Federal Reserve Chairman Ben Bernanke told Congress today (July 21) the economic outlook remains “unusually uncertain,” and the central bank is ready to take new steps to keep the recovery alive if the economy worsens.

Testifying before the Senate Banking Committee, Bernanke also said record low interest rates are still needed to bolster the economy. He repeated a pledge to keep them there for an “extended period,” the Associated Press reported.

Bernanke downplayed the odds that the economy will slide back into a “double-dip” recession. But he acknowledged the economy is fragile.

Given that, the Fed is “prepared to take further policy actions as needed” to keep the recovery on track, he said. He didn’t mention specific action being explored by the Fed policymakers. But they still have options beyond holding rates at record lows — including reviving some crisis-era programs.

Bernanke is trying to send Congress, Wall Street and Main Street a positive message that the recovery will last in the face of growing threats. At the same time, he wants to assure Americans that the Fed will take new stimulative actions if necessary.

Wall Street wasn’t convinced. Shortly before Bernanke spoke, the Dow Jones industrial average was up about 20 points. Within minutes, stocks began falling and the Dow was down more than 100 points.

The recovery, which had been flashing signs of strengthening earlier this year, is losing momentum. And fears are growing that it could stall.

Consumers have cut spending. Businesses, uncertain about the strength of their own sales or the economic recovery, are sitting on cash, reluctant to beef up hiring and expand operations. A stalled housing market, near double-digit unemployment and an edgy Wall Street shaken by Europe’s debt crisis are other factors playing into the economic slowdown.

“In short, it look likes our economy is in need of additional help,” said the committee’s chairman, Sen. Chris Dodd, D-Conn. And, Sen. Richard Shelby of Alabama, the highest-ranking Republican on the panel, said the economic outlook has become a “bit more clouded.”

With little appetite in Congress to provide a major new stimulus package, more pressure falls on Bernanke to keep the recovery going.

Bernanke and his Fed colleagues have cut their forecasts for growth this year.

If the recovery were to flash serious signs of backsliding, the Fed could revive programs to buy mortgage securities or government debt. It could lower the interest rate paid to banks on money left at the Fed or cut the rate banks pay for emergency Fed loans. The Fed also could create a new program to spark more lending to businesses and consumers in a bid to lure them to ratchet up spending and grow the economy.

Bernanke said the debt crisis in Europe, which has rattled Wall Street, played a role in the Fed’s “somewhat weaker outlook.” Although financial markets have improved considerably since the depth of the financial crisis in the fall of 2008, conditions have become “less supportive of economic growth in recent months,” he explained.

As a result, Bernanke said progress in reducing the nation’s unemployment rate, now at 9.5%, is now expected to be “somewhat slower” than thought. Unemployment is expect to stay high, in the 9% range, through the end of this year, under the Fed’s forecast.

High unemployment is a drag on household spending, Bernanke said, although he believed both consumers and businesses would spend enough to keep the recovery intact.

Bernanke also said it would take a “significant amount of time” to restore the nearly 8.5 million jobs wiped out over 2008 and 2009.

And, Bernanke said the housing market remains “weak” and noted that the overhang of vacant or foreclosed houses are weighing on home prices and home construction.

Given the weak recovery, inflation is not a problem, Bernanke said. However, Bernanke didn’t talk about deflation, a prolonged and destabilizing drop in prices for goods, the values of stocks and homes and in wages. Although most economists think the prospects of deflation are remote, some Fed officials have expressed concern about it.

To strengthen the economy, many economists predict the Fed will hold a key bank lending rate at a record low near zero well into 2011, or possibly into 2012. Doing so, would help nip any deflationary forces.

And keeping that bank rate at super low levels also would mean rates on certain credit cards, home equity loans, some adjustable-rate mortgages and other consumer loans would stay at their lowest point in decades.

Ultra-low lending rates, however, haven’t done much lately to rev up the economy. Consumers and businesses are cautious and aren’t showing an appetite to spend as lavishly as they usually do in the early stages of economic recoveries.

Bernanke, meanwhile, welcomed Congress’ new revamp of financial regulations signed into law by President Barack Obama on Wednesday. The new law, he said, “will place our financial system on a sounder foundation and minimize the risk of a repetition of the devastating events of the past three years.”

Fed’s Bernanke: Recession is ‘Very Likely Over’

Federal Reserve Chairman Ben Bernanke said today (Sept. 15)  that the worst U.S. recession since the Great Depression is probably over, but the recovery will be slow and will take time to create new jobs.

“Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time,” Bernanke said after giving a speech at a Brookings Institution conference, according to Reuters.

In declaring the recession over, Bernanke went slightly beyond the Fed’s most recent assessment that the economy was leveling off and that indications on growth had improved.

However, he cautioned that growth next year would probably be not much faster than the economy’s so-called long-run potential rate, which meant it would be slow to absorb excess capacity and pare the unemployment rate.

“The general view of most forecasters is that that pace of growth in 2010 will be moderate, less than you might expect given the depth of the recession because of ongoing headwinds,” Bernanke said.

He spoke on the one-year anniversary of the collapse of Lehman Brothers, which sparked a global panic that forced the Fed to cut interest rates to almost 0 percent.

Economists generally estimate U.S. trend potential growth to be in a range around 2.5%.

Bernanke acknowledged that a recovery could turn out to be either stronger or weaker than forecasters expect, but warned of ongoing pain in the labor market under the expected growth rate.

“Of course there are risks on both sides of that forecast — we could have a stronger recovery, we could have a weaker recovery,” he said.

“But if we do in fact see moderate growth, but not growth much more than the underlying potential growth rate, then unfortunately, unemployment will be slow to come down.”

U.S. unemployment has soared to 9.7% since the recession began in December 2007, and is forecast to hit 10% in the months ahead.

Bernanke’s comment implicitly acknowledges the possibility of a stronger-than-expected “V-shaped” U.S. recovery. The latest Blue Chip survey of economists predicts that growth will expand by a brisk 3% annual rate in the third quarter.

Fed policy-makers meet next week and are expected to keep rates pegged between 0 and 0.25% when they conclude their two-day meeting on Wednesday, while maintaining purchases of longer dated U.S. government and mortgage-related debt.

Federal Reserve Bank of Richmond President Jeffrey Lacker said on Monday that policy-makers must consider if they want to continue adding stimulus to the economy now that the recovery seems on track.

With the benchmark lending rate virtually at 0, the Fed has focused on driving down other borrowing costs by buying mortgage-related debt and U.S. government bonds.

But other Fed officials have not signaled that they favor stopping short of the $1.45 trillion mortgage debt purchase program, which is currently scheduled to end in December. The Fed has already announced plans to taper down a $300 billion longer-dated Treasury buying program by the end of next month.

Asked about the Obama administration’s plan for a sweeping overhaul of U.S. financial regulation, Bernanke said he was optimistic it would be concluded, but acknowledged that U.S. lawmakers have so far been more focused on health-care reform.

“I feel quite confident that a comprehensive reform will be forthcoming. This has just been too big a calamity and too serious a problem, and clearly regulatory problems were part of it,” he said.

Obama’s plan would give the Fed more power to oversee big financial firms deemed important to the health of the system, beef up laws to make it easier to wind down any big firm that gets into trouble, while creating a watchdog to protect consumers from complex financial products that lay at the heart of the subprime mortgage crisis that laid Lehman low.

“The Federal Reserve’s perspective is that we don’t want to be in the position that we were in last October and September, and so we’re very interested in trying to support a reform that will be effective, that will go a long way to preventing this type of crisis from recurring in the future,” Bernanke said.

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