FOMC Maintains Policy Stance to Hold Down Rates

By: Mark Lieberman, Five Star Institute Economist 10/24/2012

Pointing to slow employment growth and an “elevated” unemployment rate, the Federal Open Market Committee said Wednesday the Federal Reserve “will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.”

At the same time, the FOMC said it would maintain the target federal funds rate at 0 to 1/4 percent and said the “exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.”

The Committee voted 11-1 with only Richmond Fed President Jeffrey M. Lacker dissenting.

The FOMC decision and action had been expected.

The policy actions will not directly address the FOMC’s dual policy mandates of maximum employment and price stability, but are expected to “put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative” and “to support a stronger economic recovery.”

Despite its observations about the labor sector, the Committee, in its last meeting before Election Day, painted a slightly upbeat picture of the economy.

“Household spending has advanced a bit more quickly, but growth in business fixed investment has slowed,” the FOMC said at the conclusion of a two-day meeting. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation recently picked up somewhat, reflecting higher energy prices. Longer-term inflation expectations have remained stable.”

The statement said though “the Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions” adding “strains in global financial markets continue to pose significant downside risks to the economic outlook.”

In addition to continuing its MBS purchase program designed to keep mortgage rates low, the committee said it will also continue through the end of the year “its program to extend the average maturity of its holdings of Treasury securities” and its policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

Those actions, the FOMC said, will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year,” to keep rates low.

Lacker, the Committee said, voted against the policy because he “disagreed with the description of the time period over which a highly accommodative stance of monetary policy will remain appropriate and exceptionally low levels for the federal funds rate are likely to be warranted.”

©2012 DS News. All Rights Reserved.

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