Fed sounds more upbeat on economy, but will stick to bond-buying program
Federal Reserve policymakers said Tuesday that the economy appeared to be “on firmer footing” than at their last meeting in late January, but they nonetheless pledged to stick with their program of buying Treasury bonds to underpin the growth.
The Fed’s post-meeting statement was more upbeat than the January statement, while reiterating that the central bank expected to keep its benchmark short-term interest rate at “exceptionally low levels ... for an extended period.”
The optimistic tone appeared to help buoy the stock market. The Dow Jones industrial average was down 126 points, or 1%, to 11,866 at about 12:10 p.m. PDT, recovering from an early drop of nearly 300 points after Japan’s overnight stock market crash.
“Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually,” the Fed said. “Household spending and business investment in equipment and software continue to expand.”
But the statement also cited the “depressed” housing market and “elevated” unemployment.
The Fed didn’t mention the situation in Japan or the risk that it might pose to the global economy. However, the statement did acknowledge that “commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks.”
Although rising commodity costs “are currently putting upward pressure on inflation,” the Fed said, it believed that the effects would be “transitory.”
On Tuesday commodity prices plummeted across the board amid the global market sell-off.
Fed Chairman Ben S. Bernanke has maintained that the central bank has room to help stimulate the economy as long as underlying inflation remains low. The Fed traditionally has focused on so-called core inflation, meaning prices other than for food and energy -- although that has irritated many average Americans faced with steep jumps in grocery and gasoline costs.
The Fed in November committed $600 billion for purchases of Treasury securities through midyear, an attempt to suppress longer-term interest rates. In Tuesday’s statement the Fed said it intended to complete the program on schedule, by the end of June.
There had been speculation that the Fed might say it was stretching out its purchases into the summer. But the Fed has gotten help in pulling interest rates down: Treasury yields have fallen sharply in recent weeks, reflecting a “flight to safety” by investors frightened by the turmoil in the Middle East and by Japan’s massive earthquake and tsunami.
The Fed’s full statement follows:
Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.
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. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. 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; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.
-- Tom Petruno
Photo: Detail of the Federal Reserve's seal