The Federal Reserve Plans To Keep Rates Low For A While Yet - December 12, 2012
The Federal Reserve concluded its two-day Federal Open Market Committee (FOMC) meeting earlier today and said that it would ramp up its stimulus initiatives toward the economy. The central bank in announcing this further accommodation effort expressed disappointment with the lackluster pace of improvement in the critical employment sector.
Specifically, the Fed replaced a more modest stimulus program, which is due to expire at the end of 2012, with a fresh round of Treasury purchases. This bond-buying program will entail the monthly purchase of $45 billion in Treasuries. This move comes in addition to the $40 billion per month in mortgage-backed securities it commenced purchasing three months ago.
Also, the central bank intoned that it would likely keep the federal funds rate target near zero, where it has been for some time now, as long as unemployment, which is now at 7.7%, holds above 6.5%. Our sense is that we could be well into 2014--or later--before we see joblessness dip below that modest threshold. A low inflation rate gives the lead bank the room it needs to maneuver on the monetary front.
According to the Fed statement, “the Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.”
The latest Fed actions suggest once again that its Chairman, Ben S. Bernanke, remains much more worried about economic growth than inflation, as has been the case for some time now. He seems particularly perplexed by the inability of the labor market to show a more aggressive pace of recovery than has been the case for the duration of the business up cycle. In truth, there has been some notable improvement on this front, with November's unemployment rate falling from 7.9% to 7.7%--the lowest level in some four years. However, there was no discernible change in the total number of unemployed last month. This figure remains stuck at about 12 million. It is just that the labor force has declined. This is probably why the Fed Chairman again expressed his concerns about job growth and joblessness, even as the headline unemployment rate continues to fall.
In conclusion, this was a supportive move by the Fed and suggests that it will continue to be market and economic driven going forward, as it strives to keep what is still a somewhat tenuous business expansion intact.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.