January 30, 2013
U.S. Federal Reserve holds rate, $85 bln asset purchases
The Federal Reserve held the target for its benchmark federal funds rate unchanged at 0-0.25 percent and maintained its monthly purchases of $85 billion of mortgage-backed securities and longer-term Treasury bonds, saying the expansion in U.S. economic activity had paused in recent months, mainly due to weather-related disruptions and other temporary factors.
The Federal Reserve’s monetary policy committee, the Federal Open Market Committee (FOMC), also said it would continue to purchase Treasuries and housing market securities until the labor market shows substantial improvement, repeating its statement from December.
As in December, the Federal Reserve said it expects to maintain its “exceptionally low range for the federal funds rate” at least as long as the unemployment rate remains above 6.5 percent and inflation two years ahead is forecast at a maximum of 2.5 percent, half a percentage point over the Federal Reserve’s 2.0 percent target.
The Federal Reserve surprised markets last month by linking its easy policy stance to the unemployment rate. Previously the FOMC said it would keep interest rates low to at least mid-2015.
“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens,” the FOMC said in statement after a two-day meeting.
The U.S. unemployment rate was steady at 7.8 percent in December and has remained above this level since January 2009.
The U.S. central bank said employment has expanded at a moderate pace but the jobless rate “remains elevated.” In December the Federal Reserve forecast the unemployment rate would remain above 6.8 percent in 2014 and first decline to between 6.0 and 6.6 percent in 2015.
Illustrating the FOMC’s description of a pause in U.S. economic growth, data showed that the Gross Domestic Product contracted by 0.1 percent in the fourth quarter of 2012 from the third quarter for annual growth of 1.5 percent, down from third quarter’s rate of 2.6 percent.
The surprising shrinkage of the U.S. economy was mainly due to a a 6.6 percent annual drop in government spending due to lower defense purchases. Other data showed improvement, with consumer spending rising at a 2.2 percent annual rate, capital spending up 8.4 percent year-on-year and home construction up 15.3 percent.
Minutes from last month’s FOMC meeting showed that some members were starting to worry about the risks of continued asset purchases – known as quantitative easing – with some saying they should be finished by the middle of this year while others want the program to continue longer.
One of the committee members, Esther George, voted against today’s FOMC’s statement, saying she was concerned that the 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.”
In deciding how long to maintain this “highly accommodative stance of monetary policy,” the statement said the FOMC would consider a range of information, such as indicators of inflationary pressures and expectations and labor market conditions.
“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 percent,” it said.