FOMC Policy Stays the Same as Expected
The Federal Open Market Committee (FOMC) met Tuesday and today in its first meeting of the year with its new roster of Federal Reserve Bank presidents who vote on the policy decisions. New voting members are Esther George of the Kansas City Fed; Charles Evans, Chicago; Eric Rosengren, Boston; and James Bullard, St. Louis. George was the lone dissenter.
At its meeting in December, the FOMC had said it would continue buying $85 billion in bonds each month--$40 billion in mortgage-backed securities and $45 billion in long-term Treasury bonds. It also indicated it would keep the quantitative easing policy in place until gains in employment are substantial. It also said it would keep short-term rates at near-zero levels until it saw the unemployment rate fall to 6.5% or lower, if inflation forecasts remain near the fed's 2% target.
In maintaining this policy, the committee noted in a statement released after the meeting that "growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors. Employment has continued to expand at a moderate pace but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has shown further improvement. Inflation has been running somewhat below the committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable."
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 and of rolling over maturing Treasury securities at auction," said the FOMC. "Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative."
The committee said it expects that "with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the committee judges consistent with its dual mandate" of fostering maximum employment and price stability.
"Although strains in global financial markets have eased somewhat, the committee continues to see downside risks to the economic outlook. The committee also anticipates that inflation over the medium term likely will run at or below its 2% objective."
If the outlook for the labor market does not improve "substantially," the committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ other policy tools as appropriate, until improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, it will "take appropriate account of the likely efficacy and costs of such purchases."
The FOMC also said its "highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens." It decided to keep the target range for the federal funds rate at 0% to 0.25% and anticipates that "this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2% longer-run goal, and longer-term inflation expectations continue to be well anchored."
In determining how long to maintain the policy, the committee said it will also consider additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. "When the committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%," the FOMC said.
Voting for the FOMC monetary policy action were: Chairman Ben S. Bernanke; Vice Chairman William C. Dudley; Bullard; Elizabeth A. Duke; Evans; Jerome H. Powell; Sarah Bloom Raskin; Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. In dissenting, George noted concern that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.