December 14, 2010
Says economic recovery is 'insufficient' to bring down unemployment
WASHINGTON -- The Federal Reserve said Tuesday it will maintain the pace of its $600 billion Treasury bond-buying program because a slowly improving economy is still too weak to bring down high unemployment.
The Fed's bond purchases are intended to lower long-term interest rates, lift stock prices and encourage spending. But its decision not to increase its purchases rattled bond investors, who fear a tax-cut plan in Congress could fuel enough growth to drive up interest rates.
Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi UFJ, said investors worry the Fed's bond-buying plan won't achieve its goal of reducing long-term rates. Those rates have been rising in recent weeks as investors have raised their expectations for growth and inflation.
"Maybe bond buyers wanted to hear the Fed say it's not working, so we will buy more," Rupkey said.
Fed policymakers said they'll continue to monitor the program. They left open the option of buying more bonds if the economy weakens, or less if it strengthens more than expected.
But after the Fed issued its statement, Treasury prices sank, pushing their yields higher. The yield on the 10-year Treasury note jumped to 3.46 percent, its highest level since May and well above the 3.28 percent it traded at late Monday. The yield on the 10-year note helps set rates on many kinds of loans including mortgages. Higher rates could slow, and potentially derail, the economy's progress.
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They could also weigh on the stock market. Stock prices lost some of their gains after the Fed issued its statement. The Dow Jones industrial average rose about 48 points. Broader market averages posted slighter gains.
Critics contend that the Fed's bond-purchase program would do little to help the economy and could hurt it by unleashing inflation and speculative buying in assets like stocks.
But the Fed, in its statement, said it saw no threat of inflation. The Fed once again left its key short-term interest rate near zero, where it has been since December 2008. It also repeated its pledge to hold rates at those ultra-low levels for an "extended period."
Video: CNBC: Reactions to Fed's statement (on this page)
A broad tax-cut plan emerging in Congress is easing pressure on the Fed to stimulate growth through its bond purchases. But if interest rates keep rising, the Fed may have to step up its bond purchases to drive those rates back down.
"The Fed's job is becoming more complicated," Ken Mayland, president of ClearView Economics, said of rising interest rates.
In deciding to stay the course, the Fed said the "economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment."
Other than spotlighting the high unemployment rate, the Fed's statement was essentially the same as the one issued after policymakers adopted the bond-buying program at their Nov. 3 meeting.
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Unemployment rose to 9.8 percent in November, a seven-month high. It's exceeded 9 percent for a record stretch of 19 months. And some economists predict it could climb to 10 percent by early next year.
Concerns about persistently high unemployment was the main factor behind the Fed's decision to launch a second round of bond purchases on Nov. 3. Progress in its goal of reducing unemployment has been "disappointingly slow," the Fed said Tuesday, echoing language it used last month.
Looking at other parts of the economy, the Fed said consumer spending is rising at a moderate pace but is constrained by high unemployment, scant pay gains, weak home values and tight credit.
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, dissented Tuesday for an eight straight meeting. All year, Hoenig voted against the Fed's actions to shore up the economy -- from holding rates at record lows near zero to the $600 billion bond-purchase program.
Hoenig has said he doesn't think the economy needs the extra help. And he warns the Fed's actions could trigger inflation and a wave of speculation in financial markets.
In the policy statement released after its meeting, the Fed made no mention of the tax-cut plan, which is designed to bolster the economy.
Key elements of the tax-cut plan include: Extending 2001 and 2003 income tax cuts for two years; renewing long-term unemployment benefits for 13 more months; and reducing workers' Social Security taxes in 2011. Economists say it will boost spending by individuals and businesses. That would strengthen growth and lead companies to hire more.
"That surely puts less of the burden to boost growth on the Fed," Paul Dales, economist at Capital Economics, said of the tax cut package.
Even so, Dales and other economists believe the Fed will carry out its $600 billion purchases of government bonds by the end of June, as scheduled.
"With the jobless rate at 9.8 percent, the economy needs all the help it can get," said Sung Won Sohn, economist at California State University.
But if the economy gains momentum next year, it's possible the Fed could reduce its $600 billion program, he said.
The Fed's next meeting is Jan. 25-26.
Text of the Fed statement
Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. 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.
Associated Press and Reuters contributed to this report.