FOMC Works on Refining Policy, No Action Taken

As expected, the Federal Reserve's policymaking group, the Federal Open Market Committee (FOMC), today said it would maintain its monetary policy on bond-buying, Operation Twist, and near-zero targeted funds interest rates.
 
Noting that economic activity has continued to expand at a moderate pace in recent months, the FOMC recognized the growth in employment "has been slow, and the unemployment rate remains elevated."  While household spending advanced "a bit more quickly," growth in business fixed investment has slowed.  "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."

In discussing its statutory mandate of seeking to foster maximum employment and price stability, the committee said it "remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions." It noted strains in global financial markets "continue to pose significant downside risks to the economic outlook" and said it "anticipates that inflation over the medium term likely would run at or below its 2% objective."

The FOMC said it would continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. It also "will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed  securities in agency mortgage-backed securities," the committee said.

"These actions, which together will increase the committee's holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative," it added.

The committee will monitor information and developments in coming months, and if the outlook for the labor market "does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.  In determining the size, pace, and composition of its asset purchases, the committee will, as always, take appropriate account of the likely efficacy and costs of such purchases."

The committee also expects that a "highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens."  In particular, it decided to keep the target range for the federal funds rate at 0 % to 0.25% and "currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015."

Voting for the FOMC monetary policy action were: Chairman Ben S. Bernanke; Vice Chairman William C. Dudley; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.

Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and 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.

The FOMC met yesterday and today. It made history at its meeting on Sept. 12-13 when it opened up a third round of bond-buying known as quantitative easing (QE3) and announced it was considering changing its approach to the guidelines it issues in informing the public about the Fed's targeted interest rates for the future.
 
Last month it indicated it would consider moving from a calendar approach to its projections of the interest-rates timeline. Some on the committee have suggested it adopt a numerical target for policy.  At September's meeting, the Fed moved its projections of keeping its near-zero (0% to 0.25%) interest-rate range until about mid-2015 from its earlier projections of the end of 2014.