Fed signals no retreat from stimulus program
Federal Reserve policymakers on Tuesday vowed to stick with their program of buying Treasury bonds to try to suppress longer-term interest rates, saying the economy needed more help to reduce joblessness.
In their final meeting of 2010, Fed officials left no doubt that they intended to keep short-term interest rates near zero for the foreseeable future, and that they wouldn’t back down from their controversial bond-buying program aimed at influencing longer-term rates.
Their post-meeting statement said progress toward the Fed's goals of “maximum employment” and a proper level of inflation -- meaning higher inflation than the recent low trend -- has been “disappointingly slow.”
The statement didn’t contain any surprises. Nor did it acknowledge that Treasury bond yields have jumped over the last two months as economic data have improved -- and despite the central bank’s ramped-up bond purchases.
The Fed at its Nov. 3 meeting committed to buying $600 billion of Treasury securities through mid-2011, adding to purchases it already was making using proceeds of maturing mortgage bonds that it owns.
The central bank’s goal with its so-called quantitative easing program is to pump more money into the economy and restrain longer-term interest rates.
But the Fed can’t directly control those rates, and Treasury bond yields have surged since mid-October, in part pushed up by better-than-expected economic data.
Treasury yields continued to climb Tuesday after the Fed’s statement. They were boosted early in the day by government data showing that November retail sales rose more than expected -- adding to the sense that the economic recovery is gaining steam.
The 10-year Treasury note yield jumped to 3.45%, up from 3.28% on Monday and the highest since May. The yield has rocketed from 2.39% in early October. Other interest rates, including mortgage rates, also have risen sharply.
Although the surge in rates would seem to be frustrating the Fed, some bond traders say that without the central bank’s regular purchases of Treasuries, yields would be significantly higher. If that’s true, then the Fed’s program is working to some extent.
Critics say the Fed's stimulus program is unnecessary and risks stoking troubling inflation down the road. That view was reiterated by Thomas Hoenig, the head of the Fed's Kansas City branch, who again dissented against the majority in the policy vote Tuesday.
But Chairman Ben S. Bernanke has been undaunted, arguing that the central bank can't sit on its hands with unemployment at 9.8%.
Here is the text of the Fed’s statement:
Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.
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. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.
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 percent 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; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
Voting against the policy was Thomas M. Hoenig. In light of the improving economy, Mr. Hoenig was concerned that a continued high level of monetary accommodation would increase the risks of future economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.
-- Tom Petruno
Photo: The Fed's headquarters in Washington.